Almost every driver in the United States is required by law to carry car insurance. After an accident, car insurance can protect you from financial devastation, pay to repair your vehicle and cover your medical expenses.
If you have never purchased car insurance before, knowing what is and is not covered can be confusing. A single car insurance policy includes multiple types of coverage and it is important to understand each one. Fortunately, car insurance is not as overwhelming as it may seem, and with some research, you can feel confident making appropriate choices for your needs.
When you purchase a policy, you will select the coverages you want and a certain amount of coverage for each type. However, your state likely has legal requirements for the minimum amount of coverage you need to have.
We put together a guide to help you understand the most common types of car insurance coverage. Following our discussion of coverage types, we will also help you determine how you can find the best car insurance coverage for your needs.
The most common types of car insurance
There are six main types of car insurance coverages that are available when you purchase a policy, which include:
- Bodily injury liability
- Medical payments or personal injury protection (PIP)
- Property damage liability
- Uninsured and underinsured motorist coverage
“Liability” means that you are legally responsible for something. In the case of car insurance, that refers to a car accident that you caused. There are two types of liability in any car accident: bodily damage and property damage.
Bodily injury liability
If you are at fault in an accident, your bodily injury liability coverage will cover injuries to the other party, including their medical expenses, lost wages and pain and suffering. The coverage also extends to anyone else who is driving your car. For example, if you hit another driver and they broke their leg, your bodily injury liability coverage would pay for x-rays, surgery and time spent out of work. Most states have a minimum requirement for the amount of bodily injury liability you must carry.
Property damage liability
This covers any damage that you might cause to another person’s property as the result of an accident. It typically covers vehicles, but it can cover other items like fences, buildings, mailboxes or lamp posts. If you accidentally hit a pole or run into your neighbor’s mailbox, this is the coverage that would be used to pay for those damages. Property damage liability does not cover damage to your property. To cover your own vehicle, you will need collision coverage and to cover personal property that you may have inside your vehicle, like a laptop or household contents, you will need a homeowners, renters or condo owners policy. Most states also mandate a minimum level of property damage coverage that you must purchase.
Uninsured and underinsured motorist coverage
This coverage applies to your vehicle’s damages and your medical expenses if another driver hits you but does not have any liability coverage or does not have enough liability coverage to pay for your damages. If you, another covered driver on your policy or someone you have allowed to borrow your car gets hit by an underinsured or uninsured motorist, this type of insurance pays for damages. You can think of uninsured and underinsured motorists coverage as you buying a liability policy for drivers who drive uninsured. It functions like liability coverage but for your own damages.
Uninsured and underinsured motorist coverage can also cover the policyholder while they are a pedestrian. You may have the option to purchase both bodily injury and property damage coverage for uninsured and underinsured motorists coverage. Uninsured and underinsured motorist coverage may be optional or mandatory, depending on where you live.
In addition to the required liability insurance, you may want to consider optional coverage types for your vehicle, especially if it is newer or more valuable. This coverage is not mandated by law, but if you have a loan or lease on your vehicle, your lender will likely require it. Talking to an agent and obtaining a quote for collision and comprehensive coverage may help you decide if the extra coverage is worth the cost to you.
When your vehicle gets damaged in a collision, this is the coverage that pays for fixing the car. It can even cover damage from potholes. However, if you were not at fault for an accident that caused damage to your car, the at-fault driver’s property damage liability coverage should pay for your repairs. However, collision coverage only applies to your vehicle — it does not cover damage to the other driver’s car. Additionally, collision coverage does not cover you for mechanical failure or the normal aging of your car. If, for example, your transmission dies, you could not use your collision insurance to get it fixed. Unless you have a loan or lease on your car, this converge is likely optional. However, you will want to consider if you have the finances available to repair or replace your vehicle in the event of an accident. If you do not, you may want to consider buying collision coverage.
Comprehensive coverage is sometimes called “other than collision coverage” and pays for any certain types of damage not related to a collision. For example, it can cover damage resulting from fires, missiles, earthquakes, floods, vandalism, hitting a deer, falling objects or explosions and glass breakage. So if your car unexpectedly catches fire on the road, your comprehensive coverage may pay for the damages. Comprehensive coverage is usually optional. Just like with collision coverage though, if you have a loan or lease on your vehicle you will likely be required to carry comprehensive coverage by your financial institution. Additionally, if your car is newer or more expensive, you may want to consider adding comprehensive to your policy for peace of mind.
Medical payments coverage (MPC)
This is coverage for the treatment of injuries for you and any passengers in your vehicle at the time of an accident. Medical payments coverage strictly pays for medical bills resulting for auto accidents; it does not typically pay for things like lost wages. In some cases, medical payments coverage may also cover you if you are a pedestrian hit by a car. Your medical payments coverage has a limit, which is the highest amount of money the insurance company will pay you for medical costs. This limit is generally a per-person limit. So if you have $5,000 in medical payments coverage, that means you have $5,000 in coverage per person in the vehicle. If you are unsure how much medical payments coverage you need, seek advice from a licensed insurance agent.
Personal injury protection (PIP)
Personal injury protection, or PIP, covers you and anyone riding in your car for injuries, no matter who caused the accident. If you live in a no-fault state, you will likely be required to carry this type of insurance. If you live in an at-fault state, you are not legally required to have PIP, but you may be able to purchase it for added protection. Similar to medical payments coverage, PIP may cover medical and rehabilitation expenses, work loss benefits and funeral expenses.
Excess medical payments
Excess medical payments coverage functions like regular medical payments coverage in that it pays for your medical bills, and those of any passengers in your car, after an accident. However, excess medical payments coverage only applies to the amount of a medical bill that was not covered by your health insurance — that is the “excess.” For example, imagine you are in an accident and need an x-ray. The total bill is $700, and your health insurance pays $400. Under excess medical payments coverage, your auto insurance policy may pay the additional $300.
Residual bodily injury liability coverage
This is another type of coverage found in some no-fault states. It protects you financially if you are sued because of injuries or death caused to others. Typically, residual bodily injury liability coverage would apply if someone were injured in an accident and sued you, as the driver, for negligence. No-fault states often allow such lawsuits if the injuries are serious enough. Keep in mind that this type of coverage may not be available in at-fault states.
Vehicles, especially new ones, decrease in value the moment you take them off the lot after you purchase or lease them. If you put down a small deposit on the car, it is possible for the loan amount to be more than the market value of the vehicle. In simple terms, gap insurance covers the difference between a car’s reduced worth and the amount of the loan.
Gap insurance is often available from your lender, but can sometimes be purchased from your insurance company with your auto insurance policy. However, your insurance company may limit how old a vehicle can be to qualify for gap insurance. For example, gap coverage may be offered for a brand new vehicle but not for one that is nearly a decade old.
New car replacement
If you have a new car but did not take out a loan or lease, you will not be able to purchase gap coverage. However, the same depreciation issue applies to you — your car will quickly lose value, and if it is totalled soon after you purchase it, you may not get enough of a payout to replace it with another new car. Some companies solve this issue by offering a new car replacement endorsement, which acts similarly to gap coverage. The endorsement usually pays the difference between the vehicle’s worth and what it would cost to buy a similar new car.
This coverage is offered by most insurance providers and is almost always optional. Towing coverage, sometimes called roadside assistance coverage, pays for tows and service calls. If your car dies on the side of the road, or if you need to have a tire changed or gas brought to you, this coverage may pay the bill up to the coverage limit, which is usually a dollar amount but can be classified by the number of miles a service technician would have to drive to reach you.
Rental car coverage
Contrary to popular belief, this coverage does not automatically cover your rental car if you are on a vacation (although if you have full coverage — comprehensive and collision — your vacation rental car may be covered; check with your provider). Rental car coverage pays for the cost of a replacement vehicle if your vehicle is not driveable due to a covered loss.
How to find the best coverage for me
Each state has a specific set minimum amount of liability coverage that they require drivers to carry. These minimums are indicated by three numbers, such as 25/50/10, which refers to liability insurance. The 25 in this case means that $25,000 is the maximum that may be paid for one person’s bodily injury per accident. The second number relates to the maximum payout per accident. The third covers property damage maximum payments.
While state minimum coverage may keep your premiums low, it can also leave you exposed to financial devastation in the event of an at-fault accident. If you cause an accident and the damages are greater than your insurance limits, you must pay the difference out of pocket. Additionally, state minimum coverage does not include any coverage for damage to your own vehicle and may not include medical payments or PIP coverage (PIP is required in some states). You may want to consider buying higher liability limits or full coverage, in addition to adding some optional coverages, to round out your policy.
The best way to find the right policy for you is to shop around and compare different coverage types and the rates you could get with each provider. You can talk with a licensed agent or customer service representative to discuss your coverage needs and get quotes for various levels of coverage.
Frequently asked questions
What is the best car insurance company?
The best car insurance company will be different for every driver. Some drives will want a wide range of available discounts, some will want specific coverage options and some may just want to find the lowest premium. Knowing what factors matter most to you if often the first step in finding the right insurance policy for your needs. Once you know what these factors are, you can shop around to several different providers to find the coverage and options you are looking for at the best price for your budget.
Should I adjust my coverage when adding a teen driver?
If you have a teen who recently obtained their license, you should add them as a driver to your policy. If you have purchased them a vehicle to drive, be sure to add the vehicle as well. Teens tend to be expensive to insure, owing to their lack of experience on the road. When adding a teen, it may be tempting to reduce your coverage to save money, but insurance agents generally advise against this. Because they have less experience, teens are more at risk for getting into accidents. There are other ways to save on your insurance when adding a teen driver, like taking advantage of discounts.
How do I know how much coverage I need?
Knowing how much coverage to buy can be tricky. First, do you have a loan or lease on your vehicle? If you do, you will likely need to carry full coverage. In regard to liability coverage, most insurance professionals advise that you purchase limits higher than state minimum levels to protect yourself against financial strain in the event of an at-fault accident. You can have a licensed agent quote several different levels of coverage for you, so that you can find the level that works for you.