What are the secrets of cheap car insurance? It's easy to shave hundreds of dollars off your premium if you know how - but it's only worth doing if you understand the consequences.

That's because "cheap" insurance often just means less cover, which can come back to bite you when you make your claim.

Even so, if your premium is eye-wateringly expensive and you want to spend less up front, here are my top tips.

Shop around

I looked at what other insurers charge and it was up to $200 more a year than I pay. I was gobsmacked. Susan Taylor, chief executive officer at complaints resolution service Financial Services Complaints Limited, says she has seen cases where insurance sold through car dealers cost a lot more than buying direct.

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Keep it simple

Some insurers offer special twists such as no-claims-bonuses for life.

You pay a little more knowing you can't lose your no-claims bonus. The point, if you want to save money, is this costs more than a bog standard policy.

Get a multi-policy discount

Loyalty pays. You can get discounts of up to 20 per cent if you have two or more policies with the same insurer, says Judith Harvey, national portfolio manager for private motor at IAG.

Reduce your sum insured

Whether you have a market value or agreed value policy, you can save money by reducing the sum insured. If you have a market value policy, says Karen Stevens, Insurance and Financial Services Ombudsman, you'll only get the market value in the event of a claim anyway.

My trusty old Toyota is insured for an agreed value of $4900, which I'm told by AMI is what it would cost to replace at a car dealer.

When I checked on Trade Me, the same model with 100,000 fewer kilometres sells for about the $2500 mark, giving me wriggle room to reduce my annual premium.

Don't take the supersize options

Insurers make a lot more money when you "take the fries with that". My windscreen excess buy-out costs $60 a year. I could also insure for substitute transport costs (bus and taxi) at $96 extra a year, or a rental vehicle option at $51.

Other options included accidental death/permanent disability compensation, medical expenses and breakdown service. All these covers can be useful. But they also add to the premium.

Increase your excess

How often do you claim? If it's not often, you can save on your annual cost. The price for my policy is $150 cheaper a year with an excess of $2000 instead of $400. Work out if you can afford to pay for any smaller accidents, says Amelia Macandrew from AA Insurance.

Remember, you may lose your no claims bonus if you claim for those smaller dings, anyway.

Choose your car carefully

Some cars are cheaper than others to insure, says Macandrew. Consider this before buying.

Garage and immobilise it

Many insurers offer a discount if your wheels are garaged and/or have an immobiliser fitted. What's more, if you avoid accidents and theft you won't have to pay your excess in the first place. Drive defensively and think about where you park your vehicle.

Downsize your cover

Third party cover, where only the other person's costs are covered, or third party fire and theft are a lot cheaper than fully comprehensive car insurance.

Some sort of third-party cover is essential to pay out if you crash into something expensive like a Ferrari, a house, or a power junction box.

Assuming you have a cheap car that you can afford to replace it might not be worth paying for fully comprehensive cover. I pay $457 a year for my comprehensive policy on an old banger (including about $100 for an underage driver). For third party fire and theft that reduces to less than $200.

Harvey points out that with many insurers you get "innocent party protection" of about $3000 thrown in with your third party cover, providing you can get the other driver's details after an accident. You're probably not covered, however, for a hit and run.

Pay annually

Sometimes it's cheaper to pay your insurance premium in a lump sum once a year rather than monthly.

Read your policy Finally, as Insurance & Financial Services Ombudsman Karen Stevens says, always read your policy to ensure you understand what is and is not covered.

That's especially important for policies bought over the phone. Online sales draw your attention to the fine print, whereas that can be glossed over on the phone with the buyer not being made aware of the shortcomings of a policy.