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Your Guide to Car Insurance Coverage

Understand the types of auto insurance, what questions to ask when buying, and how you might save you and your family some hard-earned cash.

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Types of Car Insurance: What’s Available?

According to the National Association of Insurance Commissioners (NAIC), auto insurance policies most often contain liability insurance for bodily injury, liability insurance for property damage, and uninsured/under-insured motorists’ coverage. There are many types of coverage available, and what is best depends on the driver, the situation, and preference. Here’s a detailed rundown of the ten most common mandatory and optional car insurance types.

Mandatory Car Insurance Coverage

Many states require drivers to carry auto insurance, but the amount and the type you need varies by location. Make sure you research the requirements in your area before purchasing, but we’ve provided some general information below to provide a starting point for finding the policy that’s right for you.

Liability Insurance

Liability insurance compensates others for damages resulting from an accident that you or anyone else covered under your policy causes. Those eligible for compensation under your liability coverage include the driver and/or passengers in another vehicle as well as pedestrians and passengers in your vehicle who are not related to you. It does not, however, pay for damages to you or anyone else covered under your policy. Except for New Hampshire, and New Hampshire drivers must still provide proof of financial responsibility, all U.S. states require drivers to carry minimum levels of liability insurance.

There are two basic forms of liability auto insurance:

  • Bodily Injury:
    Bodily injury liability coverage helps pay for any medical expenses (e.g., emergency services, hospital care, physical therapy, etc.) and/or lost wages and income incurred due to the physical injury to those eligible under your policy.
  • Property Damage:
    Property damage coverage pays for the costs of damage repair or the replacement of another person’s vehicle as well as any property loss caused by you in an auto accident.

State laws require drivers to purchase minimum amounts of liability bodily injury and, in most states, property damage coverage with minimums varying by jurisdiction. You can also purchase liability coverage with higher maximum limits than your state’s mandated minimums. This is worth considering since you may have to pay out of pocket for any differences between the damages suffered by someone receiving compensation under your policy and the actual amounts paid out under that policy.

What are the different levels of liability coverage?

If you have ever shopped for a car insurance policy, you’ve likely encounter numbers presented in a format like this: 50/100/50. Here’s what each number represents:

  • The first number (the first 50 in the example) represents the bodily injury per person payout limit. This means the insurer will pay a maximum of $50,000 to each person injured in an accident in which the insured is at fault.
  • The middle number represents the maximum total amount the insurer will pay out for any single accident for which the insured is at fault. In our example, that maximum is $100,000.
  • The third number (the second 50) refers to the maximum payout for property damage resulting from a single accident. The maximum n our example amount is $50,000.

Optional Car Insurance Coverage

If you’re the “at fault” party in an accident, liability insurance covers the damages caused to others that result from that accident. But what about the damages you suffer in the accident? That’s where collision and comprehensive insurance comes in. Bear in mind that collision and comprehensive coverage is optional for drivers who own their vehicles outright but mandatory for those who are financing or leasing their vehicles.


Collision coverage pays you (i.e., the insured) for the repair or replacement of your vehicle when damaged in a collision with another vehicle or a stationary object (e.g., a tree, fence, guardrail, etc.). It typically also covers damage from a non-collision driving accident like a rollover. Damages resulting from the accident not covered by collision insurance include medical bills, yours or anyone else’s, damage to another person’s vehicle, and damage to your vehicle unrelated to driving.

There are several similarities between collision insurance and liability insurance. Collision coverage is also normally limited to your vehicle’s fair market value (i.e., its value minus depreciation). This is often referred to as actual cash value (ACV). Collision coverage also includes a deductible that you must pay to help cover the costs of repairs or vehicle replacement. Deductible amounts vary, and you can decide how much it should be when you set up your policy. Your choice of deductible amount will affect the amount of your monthly premium.

When considering whether to purchase collision insurance or how much coverage to get, ask yourself the following questions:

  • What is my car’s current fair market value?
    Given the costs of a monthly premium and the amount of the deductible, it might be better to forego collision coverage and pay for your repairs or a replacement vehicle out-of-pocket if your damaged vehicle’s ACV is minimal.
  • Am I a safe driver?
    If you are, you may want to go without collision coverage. It’s a bit of a risk, but it’s a risk worth taking if you really are a safe driver.
  • Can I afford the monthly premium?
    If the extra cost of collision coverage puts a real strain on your budget, learn what you can do to save money on your car insurance from the Insurance Information Institute (III). You can also talk to your insurance agent, who can reduce your overall insurance premium by raising your deductible or finding other car insurance discounts.


Comprehensive insurance covers damages to your vehicle resulting from occurrences other than those covered by collision insurance. These typically include:

  • Theft of the vehicle and damage caused by theft
  • Vandalism from fires, riots, explosions, the general bad behavior of others, etc.
  • Falling trees, tree limbs, and other objects
  • Rocks and other objects falling off of – or kicked up by – other vehicles
  • Weather-related events like storms, wind, hail, lightning, floods, etc.
  • Earthquakes and similar nature-related causes
  • Animals, like hitting or being hit by a deer

Comprehensive insurance is similar to collision insurance regarding coverage limits. Payouts are limited to the cost of repair or ACV of your vehicle, whichever is less, and other property of yours damaged by the accident. Also like collision coverage, comprehensive insurance requires payment of a deductible.

Ask yourself these questions when considering purchasing comprehensive coverage:

  • What is my car’s current value?
    Consider whether it might be cost-effective to forego comprehensive insurance and pay for any damages to your vehicle yourself.
  • Do I use my car in a safe or dangerous environment?
    Think about the types of damages covered by comprehensive insurance and consider how likely it is you’ll need to file a claim given the level of danger from natural weather events and/or criminal activity in your area.
  • Can I afford the premiums?
    If you have serious concerns about your ability to pay your monthly premiums, speak to your insurance agent about ways to make comprehensive coverage more affordable.

Uninsured (or Underinsured) Motorist Coverage

Quite possibly the most confusing type of car insurance coverage are uninsured motorist (UM) and underinsured motorist (UIM) insurance. UM/UIM insurance is coverage that the insured pays for to cover damages resulting from an accident with a vehicle driven by an uninsured (i.e., someone without insurance) or underinsured (i.e., someone without enough insurance) driver.

With UM/UIM insurance, you as a responsible, insured driver buy insurance to protect yourself and your passengers from irresponsible, uninsured and underinsured drivers. While this may seem unfair, the reality is that around one in eight drivers, according to the Insurance Research Council, are uninsured or underinsured. UM and UIM insurance protects you from the damage others may cause.

UM/UIM insurance may pay for bodily injuries, property damage, or both, depending on your specific coverage. UM/UIM insurance is required in some states and optional in others. When considering whether or not to purchase UM/UIM insurance, ask yourself:

  • Can I afford to pay out of pocket for the damages from an accident caused by an uninsured or underinsured driver?
    If not, strongly consider getting UM/UIM coverage.
  • Should I purchase UM/UIM bodily injury coverage if I have health insurance?
    Your health insurance should cover the costs of any injuries you may incur in an accident with an uninsured or underinsured driver. You may want to get it anyway, though, since UM/UIM bodily injury insurance also pays for some things your health insurance may not, like long-term care related to your injuries. Also, there’s typically no deductible with UM/UIM bodily injury coverage.
  • Does UM/UIM insurance pay for my damages in a hit-and-run accident?
    Yes, it does.

Other Car Insurance Coverage to Consider

So far, we’ve covered the most common types of car insurance, both mandatory and optional. There are a few other less-common coverages you may want to consider to fill in any missing areas in your insurance protection.

Personal Injury Protection

Personal injury protection (PIP) insurance covers injuries incurred by you, the insured, and your passengers in an accident regardless of who is at fault. Expenses covered typically include:

  • Medical expenses including those for physical therapy and other rehabilitation services
  • Lost wages due to personal injury, accidental death benefits, and funeral costs
  • Essential services that your injuries are preventing you from doing yourself, like house cleaning and childcare

PIP insurance is required in all U.S. jurisdictions with no-fault insurance laws. Currently, according to the III, this includes 12 states and Puerto Rico. PIP insurance is often thought of as the same thing as no-fault insurance since a finding of fault for the accident is not made. A small number of at-fault states require PIP insurance as well.

New Car Replacement

Owning a brand new car feels great. Unfortunately, a new car begins to depreciate pretty steeply the moment you drive it off the dealership’s lot. If you get into an accident that totals your vehicle fairly soon after you buy it, you’ll find that your insurance won’t come close to covering the amount you paid for it unless you have new car replacement insurance.

New car replacement coverage pays the full price for a new vehicle of the same make and model, minus the deductible, of your damaged one instead of only paying its depreciated value. New car replacement insurance is typically offered as a policy add-on to collision and comprehensive coverages, both of which you must have to purchase the car. There are also time, normally 12 months, and mileage, normally 15,000 miles, limits to this coverage.

Gap Insurance

Gap insurance helps you pay off your auto lease or loan if your vehicle is totaled or stolen when the vehicle’s depreciated value is less than the remaining balance on the lease or loan. Having gap insurance is not mandated by law, but your lender or lessor may require you to carry it along with collision and comprehensive coverage during the early stages of the loan or lease when the ACV of the vehicle is less than the loan or lease balance. You may be able to avoid the need for gap insurance if you put a substantial amount down on the loan or lease, typically 20% or more, and/or your loan or lease period is less than 60 months.

Roadside Assistance

Roadside assistance insurance provides a package of helpful services if your car breaks down. These include changing a flat tire, jump-starting a dead battery, unlocking your car, providing fuel when you run out, extricating your vehicle from a ditch or when it gets stuck in the snow or mud, and towing you to the nearest repair shop. Roadside assistance coverage is typically offered as an add-on with most car insurance policies, but there are other ways to get it. The most common alternative is joining an auto club like AAA, but some credit cards also provide roadside assistance as a cardholder perk.

Rental Car Coverage

When you rent a car, the rental agent offers you the opportunity to purchase rental car insurance, usually with several options. You’ll at least want liability coverage, but you may not have to purchase it at the rental counter. Most likely, the liability insurance you have on your own vehicle also protects you against any bodily injuries or physical damage you cause while driving your rental. Other coverages your car insurance policy may provide include a loss-damage waiver (protecting you if your rental is vandalized, damaged, or stolen), personal accident coverage (protecting you for injuries to you or your passengers while driving the rental), and personal effects coverage (reimbursing you for any personal items stolen from your rental car). Some credit cards also provide their customers with rental car coverage when the rental is paid for with that card.

Medical Payments Coverage

Like personal injury protection coverage, medical payments (or MedPay) insurance helps pay medical expenses for injuries that you and/or your passengers incur in an accident in your vehicle regardless of who is at fault. Areas of coverage typically include ambulance services, medical treatment, surgeries, hospital stays, rehabilitation and long-term nursing services, dental care, and funeral expenses. MedPay differs from PIP coverage in a few ways. Most importantly, MedPay is optional in all states where it’s available while PIP insurance is often required and available primarily in no-fault states. Also, PIP insurance typically includes coverage for such items as childcare and lost wages, while MedPay insurance does not.

How to Choose Your Car Insurance Coverage

With a solid foundational knowledge of the various types of car insurance and the minimal levels of coverage required in your state, it’s now time to apply that knowledge to your situation. Below are three important questions to ask yourself before beginning to shop for a car insurance policy. If you still feel uncertain about the types and levels of coverage you should carry, consult with a few insurance agents in your local area. Good agents are willing and able to answer any outstanding insurance questions you may have whether or not you purchase a policy through their agency.

Who Owns the Car?

If you purchase your car without taking out an auto loan to pay for it, you are only required to carry the minimum types and amounts of insurance coverage mandated by your state. That means liability coverage and, in many states, UM/UIM coverage. However, if you take out a loan to purchase your car or if you lease a vehicle, you’ll almost certainly have additional insurance requirements as a condition of the lender or lessor. These almost always include both collision and comprehensive coverages as well as UM/UIM property damage coverage. Coverage amounts must be enough to reimburse the lender or lessor for the ACV at the time of the accident.

If you finance your vehicle, you can drop these extra coverages required under the loan agreement once the loan is paid off. Lessees need to maintain the insurance requirements in the lease throughout the entire leasing period. Keep in mind, though, that this involves minimum insurance requirements, and you’ll likely want types and amounts of coverage beyond the mandated minimums. For example, drivers financing their vehicles may want to consider additionally carrying gap insurance in the early stages of their loan periods.

How Much is the Car Worth?

In terms of collision and comprehensive insurance, you’ll want enough coverage to compensate for the full amount of damages you incur in an accident. More coverage, of course, means a higher monthly premium. So, if you’re rocking a hot, new convertible that’s worth more than a small house, expect insurance costs to reflect that. However, it’s important to remember that the most your insurer will compensate you is the ACV of your vehicle at the time of the accident if it is totaled. The ACV is also what insurance companies use to determine your monthly insurance premium. How they determine your car’s ACV is a bit of a trade secret, but you can get a good idea of your vehicle’s current value by consulting the Kelley Blue Book or any similar valuation guides.

In addition, except for antique and some exotic cars, there comes a time in the lifespan of a vehicle when you’re probably better off financially to drop either or both your collision and comprehensive coverages. When it comes to comprehensive coverage, a good gauge is to subtract the amount of your deductible and the cost of the premiums on a six-month policy from your car’s current ACV. If you come up with a negative total, it might be time to drop your coverage. The bottom line is that if you’re driving Uncle Joe’s hand-me-down jalopy instead of a hot, new convertible, carrying collision and comprehensive insurance is probably not worth it.

What’s Your Deductible?

Your car insurance deductible is the amount of money you pay out of your own pocket toward the total cost of damages from an accident before your insurance company pays anything. If you’ve never purchased auto insurance before, here’s something you can count on: the higher your deductible, the lower your monthly premium, and vice versa.

Deciding on the right balance between deductible and premium is a bit tricky. Factors to consider include:

  • Your monthly budget:
    As we said, a higher premium means a lower deductible. If your budget can handle a larger monthly premium, it may be worth paying it.
  • Your car’s value:
    A high deductible is usually better for more expensive cars and a lower one for cheaper models.
  • Likelihood of an accident:
    If you’re a particularly safe driver, consider a higher deductible. If you have a history of getting into accidents, you’re probably better off choosing a lower deductible and paying a higher monthly premium.
  • Risk tolerance:
    Are you comfortable taking risks? Consider a high deductible. Risk averse? Go with a low one.