How to decide what type of car insurance is best for you
Australian drivers can choose between three types of optional car insurance. (Adobe Stock)
An email that opens with "It's time to renew your car insurance" is hopefully among the less exciting correspondence to grace your inbox.
Comparing your options can feel daunting, but it's the kind of task that it pays (literally) to get right.
Jodi Bird is the managing financial content editor at consumer advocacy group Choice. (Supplied: Choice)
According to the Insurance Council of Australia, comprehensive car insurance costs increased by an average of 42 per cent between 2019 and 2024.
Insurance expert at consumer group Choice, Jodi Bird, says car insurance costs grew about another five per cent last year.
"It can be fairly easy to over-insure your car, particularly because the cost of used cars comes down every year," he says.
With all this in mind, how do you know what type of insurance is worthwhile for you?
What are the types of car insurance?
The main types of optional car insurance are: third party property damage; third party property damage, fire and theft; and comprehensive.
Mr Bird says comprehensive is the highest level of cover, while third party property "just covers damage to another person's car".
"If you're in a 20-year-old Hyundai and you crash into someone's Porsche, it should pay for the other person's Porsche but not your Hyundai," he says.
"The good thing about car insurance is that the policies have a lot more in common than other insurance types."
It's also worth remembering that compulsory third party insurance covers injuries you have caused to people, but does not cover any damage to your or anyone else’s car or property.
And while it is compulsory, how it works varies between jurisdictions. In NSW it's known as a green slip and in some states it's simply part of your car registration.
Should I get third party or comprehensive car insurance?
Fei Huang says the type of policy that makes the most sense for you depends on your car.
Dr Huang is an associate professor in the School of Risk and Actuarial Studies at the University of NSW Business School in Sydney/Gadigal, and says anecdotally she hears that people often opt for comprehensive insurance as the default, but it might not be worth it for everyone.
"If you have a very old, low-value vehicle I would not recommend going to comprehensive immediately."
Mr Bird says comparing the current value of your car with insurance costs can help you decide.
"A very rough rule of thumb is that if you're paying more than 20 per cent of your car's value in insurance each year, then you want to have a shop around for a cheaper policy."
This might mean finding a cheaper comprehensive policy or downgrading from a comprehensive policy to a third-party option, he says.
"If you've got a cheaper, older car then you want to look at where you can save money on your insurance to save up for the next car."
Dr Huang recommends calculating what your car is worth today versus the cost of insurance.
"If you have a high-value vehicle you might want to opt for the comprehensive one to give you peace of mind, in case you can't afford any unexpected repairs or replacements."
When weighing up the cost of a policy, Dr Huang says to also consider how much you use your car.
Dropping any "unnecessary add-ons" (such as expensive roadside assistance or cover for personal belongings) or choosing a higher excess could also decrease your premium and alter the equation, she says.
The excess is the amount you pay out of pocket when you make a claim, as opposed to the premium, which is the amount you pay for insurance (yearly, monthly or quarterly).
What to check for in a car insurance policy
Dr Huang says comprehensive cover "doesn't necessarily cover everything". Policies often exclude wear and tear and mechanical breakdowns, she says.
"It’s important to check the limitations and exclusions."
Fei Huang says insurance literacy is something people "really need to work on". (Supplied: University of New South Wales)
Drivers may also want to factor in the standard of service the insurer provides when something goes wrong, but it can be hard to get a sense of that unless you've had a bingle.
Dr Huang recommends checking the policy for details, reading for reviews and asking about other people's experiences.
MoneySmart recommends comparing the exclusions and inclusions of different policies.
Some policies might not cover mechanical failure, storm damage or vandalism (intentional damage).
Conversely, some policies offer inclusions such as free roadside assistance, free towing and car hire.
Avoid the 'loyalty penalty'
Mr Bird says people can get unduly attached to their "loyalty bonus" or "no claims bonus".
These may once have meant cheaper insurance, but these days Mr Bird says it's called a "loyalty penalty" because he says new customers often get a better deal.
Both Mr Bird and Dr Huang are strong advocates for shopping around to get the best price.
"Actively compare the different providers' premiums and then change providers," says Dr Huang.
"This can potentially save you several hundred dollars."
This is general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.