Imagine you’re cruising down the road in your new-to-you used car when something horrific happens. You turn a corner, and suddenly there’s a face just inches from yours. You’ve crashed into a telephone pole! What do you do?
If you’re not injured, the first phone call that you make should be to your insurance agent. Your agent will help you find the right car insurance for your situation.
Knowing the different types of auto insurance coverage is important to choose the right type of insurance for you and your vehicle. In general there are three types of coverage: liability, collision, and comprehensive, as well as other common insurance.
Table of Contents
1. Liability Coverage
Liability coverage covers your legal responsibility to others for bodily injury or property damage. Bodily injury liability pays medical expenses of people injured in an accident you cause while under this part of your policy. Property damage pays the other driver’s repair bills for damages caused by your car if that person is found at fault.
Depending on the state, the minimum amount of liability insurance is usually $15,000 to cover bodily injury for one person, $30,000 to cover injuries for more than one person, and $10,000 to cover property damage.
2. Collision Coverage
Coverage for damage to the car you drive is called collision, and generally pays out if the other guy is at fault in an accident. It usually does not cover damage caused when your vehicle hits an animal. But, if damage from hitting an animal falls under your state’s “comprehensive” coverage (see below), you can choose whether to get this part of collision insurance anyway.
Collision insurance does two things: it pays for repairs and replacement costs after a car accident — and it pays your deductible. That means that the first part of any claim will be paid by your collision insurance. As the policyholder, you’re responsible for paying the deductible amount at the beginning of a claim, typically $500 to $1,000.
3. Comprehensive Coverage
The third, and often most expensive type of insurance, is comprehensive. This covers your vehicle against non-accident damage like theft, fire or storm damages (basically any accident that isn’t caused by another driver). A few states require this type of coverage but many if not most drivers opt to pay the extra premium for this protection.
Comprehensive insurance can vary quite a bit on price, depending on where you live and how much of the car is being insured. Insurance companies consider several factors in determining how much to charge for comprehensive coverage — including where you live, theft rates in your area, and whether or not your car has anti-theft devices installed.
It is important to note that even if you buy comprehensive coverage, your car won’t be protected everywhere. This type of insurance mostly applies when the vehicle is parked and unattended.
So, if you’re in a parking garage, on the street or in some other location where your car could be vulnerable to a break-in, you’ll have to rely on the physical damage coverage for your car, if it exists in your policy. This is why some experts recommend getting extended or supplemental insurance when you buy comprehensive coverage.
Another thing to consider when buying this type of coverage is how much you stand to benefit from total loss protection. In many cases, you can get better coverage by purchasing an actual cash value policy instead of a replacement cost policy. This means that your car would be paid out for its depreciated value, rather than the price to replace it with a brand new one.
Some consumers choose to “self-insure” their vehicle, meaning they take the cash value payout from the liability claim for damages caused by an accident or storm damage instead of opting for insurance. This is a method sometimes used by those who can’t afford comprehensive coverage, but want to keep their vehicle covered. Of course, this means that if your car is totaled you would have no way to replace it without digging into your own pocket.
4. Uninsured Motorist Insurance
Uninsured motorist insurance protects you financially if an uninsured driver hits you. It’s important to note that not all states require drivers to have this type of coverage, so it’s wise to check with your insurance company or agent before buying this kind of policy.
It should also be noted that the other driver has to actually hit you, not merely hit something you are in or attached to. For example, let’s say your car is parked on the street while your wife drives it, and an uninsured drunk driver hits — even if that person doesn’t have insurance there will be no claim under this type of protection because the accident was not caused by an uninsured motorist.
Uninsured motorist insurance is usually fairly cheap, it’s important to carry the minimum liability coverage required by your state. This varies from state to state, but you can typically get away with carrying a $50,000 limit on each person injured in an accident and about a $100,000 limit for all injuries per accident in most states.
5. Underinsured Motorist Insurance
Underinsured motorist insurance covers you in the event that the other driver has liability coverage, but it’s not enough to pay for all your damages. This type of policy is usually only required when the other driver has no insurance or not enough to cover your total costs.
To calculate how much underinsured motorist protection you should buy, take a look at the liability coverage limits on the other driver’s policy. If their limit is $15,000 and your medical expenses are going to be $25,000, you have a difference of $10,000. In this case, you would buy about that much in underinsured motorist insurance.
Many people purchase both uninsured and underinsured motorist coverages to insure against all possible dangers on the road. While it’s a smart decision, purchasing too much of this type of coverage can actually hurt you financially if you ever have a claim because most companies will not pay out more than your limit for any one accident — this is called stacking.
In the case of uninsured motorist protection, this means that you could have a claim denied if the other person has less than your policy limit.
6. Medical Payments Coverage (MPC)
Medical payments coverage pays for the medical expenses of you or anyone else covered under your policy if they are injured in an accident, regardless of who is at fault. It’s important to note that this only covers medical treatment, not property damage.
This type of coverage can be very expensive, therefore it is usually bundled with other coverages such as collision or comprehensive. For this reason, it’s a good idea to make sure you have enough liability coverage to cover the cost of your medical expenses if you were at fault for an accident.
7. Personal Injury Protection Insurance (PIP)
Personal injury protection insurance is often referred to as PIP and is usually included with your standard car insurance policy. There are states that do not require this, but in most places it is compulsory for all drivers.
If you live in a state where it’s optional, it would be wise to carry the minimum amount of coverage required by law because this type of coverage is very expensive.
This insurance covers a wide range of costs associated with an accident, from your medical expenses to lost wages from being unable to work. PIP will pay for all those costs up to the limit on your policy. If you have more than one person covered on your policy, that amount will be split between them.
As with medical payments coverage, this type of insurance often overlaps with other coverages such as collision and comprehensive. For example, your PIP may be responsible for some of the costs of fixing or replacing your car if it’s totaled, whereas your collision coverage will pay for the rest of that cost — up to its limit.
8. Gap Insurance
Gap insurance covers you if your car is totaled or stolen and you still owe money on it. The majority of loans are “non-principal reduction” meaning the difference between what you owe on the loan and what the car is worth cannot be written off, but gap insurance will cover that amount up to your limit.
9. Rental Reimbursement Coverage
Rental reimbursement insurance helps you pay for a rental car if your vehicle breaks down due to an accident, bad weather or other covered reasons. It’s a good idea for those who need a rental car often and may not have much cash on hand to pay for them. This is usually inexpensive, sometimes as little as $5 per month or less, depending on your insurance provider and location.
Final Thought
This article hopes to have let you know about the different types of car insurance available. While it’s important to carry the minimum amount of coverage required by law in your state, it is also important to purchase enough coverage to protect yourself against all possible dangers on the road. If you are unsure about what your policy covers or how much you need, consult with your insurance agent.
