Learning More About Car Insurance Binders
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UPDATED: Feb 5, 2019
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Buying car insurance products is much different than realizing you forgot to buy milk at the store. If you need to run out and get milk, you stop at the local grocer, buy it and you have milk.
Auto insurance involves a delay between shopping and actually having coverage. For that reason, something called a car insurance binder exists.
The car insurance binder is essentially short-term proof of coverage, which goes out of effect rather quickly. Its intent is to extend coverage to you while you wait for your auto insurance policy to complete underwriting, make payments, and finally have your permanent car insurance policy go into effect.
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You may be wondering how you could have driven without insurance, and why someone might need a car insurance binder in the first place. Essentially a binder is just a temporary coverage, given to you while you wait for your permanent coverage to go into effect.
If you lived in a big city, like New York, and relied upon public transportation, walking, and taxis exclusively without owning a car, then moved to Montana, you would need car insurance immediately when you purchase your vehicle.
While you wait for your car insurance, you get a binder. If you are likewise a teenager who’s decided that buying your own policy is far cheaper than being lumped onto your parents’ plan, then you may need a binder.
How to Get A Binder
It is not so much a matter of how but the matter of necessity. Your potential insurer may offer up a binder while you await results of underwriting.
When you are in the underwriting process, the insurance carrier’s number crunchers evaluate whether you are someone they want to insure, and what type of risks you pose to them.
When the insurance companies use the word risk they are referring merely to the chances that they will have to pay out any claims for you.
Therefore, they look at statistical likelihood of your demographics and characteristics, specifically including the following details:
- The make and model of vehicles you are insuring
- Driving history (young and fabulous? They jack up the rates to allow for newbie drivers who make mistakes on the roadways
- Where you live. They are evaluating whether you live in a place that is safe, or prone to being side-swiped, broken into, or stolen.
- How far you drive to work every day, because the longer the commute equates to a greater chance of getting into accidents.
- Age. If you are older, then your senses and reaction times may be lagging. In addition, you may be slower behind the wheel because of physical ailments.
- Credit Score. The credit score is linked to likelihood you will file a claim. People who have better credit are proven less likely to file an insurance claim. If you file claims, your rates increase for years. Most repairs are simple, not catastrophic. In addition, people with more money may take on higher deductibles.
- Level of coverage. If you are insuring a new luxury sportscar that can go 200 miles per hour, your insurance will charge more than if you are driving around in the soccer mom’s van.
Collision and comprehensive are two types of coverage that are optional once you own your vehicle outright. If you are leasing or have a loan, also known as financing, then your vehicle must include these coverage areas.
Comprehensive is everything that is delineated in your insurance policy related to the vehicle’s coverage that is not collision. Collision refers almost exclusively to crashes, whether into other vehicles, or into people’s personal property.
Once your vehicle decreases to a low value, then you are at the crossroads and must decide whether you should continue carrying collision and comprehensive, or if it is wiser to save your money.
Again, though, this is a personal decision. For some, they may not have the financial resources right now to replace vehicle, or make repairs out of pocket by themselves. They may keep a reasonable deductible, anticipating that not every type of damage will destroy the entire vehicle.
If your car is totaled out, then you would be on the hook to pay thousands to buy another car all out of your own pocket.
However, if you are still cash strapped, realize that the insurer is only going to reimburse you the amount that your car was actually worth at the time of the accident. So, if it is 10 years old and only worth three-thousand dollars, you might receive that much.
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Deciding on GAP Coverage
Along the same lines of coverage is something called GAP, or guaranteed auto protection insurance.
GAP insurance provides coverage for the difference, or gap, between the amount an insurance company will pay out and the value of your vehicle.
It is vital to consider this piece of insurance particularly when leasing a car because it may be a financial savior.
It’s best to think of it this way. If you bought a 50,000 dollar car, as soon as you drive it off the new car lot, it drops in value, by thousands of dollars.
If you want to be on the hook for that difference, then skip gap insurance.
If you are putting down a small amount for the down payment when buying or leasing, in particular, you might think of GAP as a necessity.
What happens is that your insurance carrier may pay out for a totaled car, but it will be at the actual value of the vehicle.
This value, because of precipitous drops in value after driving off the lot, is likely to be less than you paid for the car.
You have to pay the difference to get your car replaced or fixed.
When you are buying a car, it is a big investment. The reason people take out loans is because they cannot afford the cost of a car outright.
Or, they prefer to save their cash for other purchases, or a rainy day. In the event of an accident prior to permanent coverage, a car insurance binder provides proper insurance.
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