What is car insurance and what does it cover? Here is everything that you need to know about the different types of car insurance.
There are six main types of car insurance. These are liability car insurance, uninsured and underinsured motorist coverage, PIP coverage, medical payments coverage, collision coverage and comprehensive coverage. Also, there are numerous other optional coverages like rental car insurance, rideshare car insurance, gap insurance coverage and new car replacement coverage.
In this car insurance coverage guide, we will explore the different types of car insurance, the mandatory coverages, the optional coverages, as well as what is covered under each policy. And by the end of this guide, you will have all the information that you need to put together a car insurance policy that aligns best with your coverage needs.
We’ve been in the car insurance industry for several years. So, when it comes to matters of car insurance, you can rely on us to provide you with relevant, valuable, objective and informative content, which can help you make the right decisions with confidence.
Liability Car Insurance
Liability coverage is a type of car insurance, which is required in almost all states. It helps to pay for the other party’s expenses if you are held liable for a car accident.
Liability car insurance features two main components: bodily injury liability coverage and property damage liability coverage.
Bodily Injury Liability Coverage
If you are at fault for a car accident that causes injuries to the other party, then this type of car insurance will pay for the other party’s medical bills and associated expenses resulting from the injuries. Bodily injury liability insurance covers the following:
Bodily injury liability coverage will pay for the other party’s medical expenses such as emergency medical services, hospital stays, treatment and medications as well as follow-up doctor visits.
It may also pay for other associated medical expenses like having to purchase a wheelchair or crutches for the victim.
Compensation for Lost Wages
After being injured in the accident that you caused, the other party may have to undergo physical therapy for several months, as part of the recovery process.
Also, the other party may be forced to miss work for several months, due to the injuries sustained from the car accident.
So, if the injured party cannot be able to engage in productive work due to injuries suffered from the accident, the at-fault driver’s bodily injury liability coverage will help to compensate for lost wages and income.
Different states have different limits on the limits of compensation amount that the affected party may receive.
After you’ve caused an accident, the other party or their car insurer may take you to court, seeking additional compensation for injuries sustained from the accident.
And in such a situation, you may have to seek legal counsel, which doesn’t come cheap. Fortunately, your bodily injury liability coverage will also help to cover part of your legal fees.
How Much Bodily Injury Coverage Do You Need?
State laws usually dictate the amount of bodily injury liability coverage that you should have on your car insurance policy.
Hence, when you are purchasing this coverage, you need to ensure you first adhere to your state’s minimum requirements. From there, you can choose the amount you want, depending on your budget and your risk factors.
However, it’s important to note that if you injure someone during a car accident and their medical expenses exceed the limits on your policy, then you will be forced to pay the balance out of pocket.
So, when you are purchasing this coverage, it’s always advisable to purchase more than your state’s minimum requirements, to ensure you have adequate coverage in case you cause an accident.
Similar to other types of car insurance, bodily injury liability coverage comes with coverage limits, which refer to the maximum amount your insurer will pay for a covered claim. These limits include per-person limit and per-accident limit.
The per-person limit refers to the amount of money each individual injured during the accident will receive for a covered claim.
For instance, if your per-person limit is $100,000 and one person is injured during a car accident, your policy will compensate them up to $100,000, to cover their medical expenses and associated costs.
Per-accident limit applies when several people are injured during a car accident. For instance, you may cause a car accident and three people are injured, a driver and two passengers.
If the per-accident limit on your bodily injury liability insurance is $200,000, then the maximum amount your policy will pay for their combined expenses is $200,000.
Property Damage Liability Coverage
If you cause a car accident that damages another person’s party or property, then this type of car insurance will cover the repair or replacement costs.
Just like bodily injury liability coverage, property damage liability coverage is also mandated in almost all states.
You should note that property damage will not cover your vehicle’s repair or replacement costs, since that coverage falls under collision coverage.
Instead, it applies to the other party. For instance, if you collide with another car and you are deemed liable for the collision, then your property damage liability coverage will help to repair or replace the other driver’s car.
Also, if you run your car into your neighbor’s fence or you swerve and hit a telephone pole by the roadside, this coverage will kick in and cover the costs of repairing or replacing the fence or the pole.
How Much Property Damage Liability Coverage do You Need?
States that mandate liability car insurance also set minimum requirements, which you must have on your car insurance. These coverage limits vary from state to state.
For instance, if you live in Georgia, the minimum amount of property damage liability coverage that you should have is $25,000 per accident. In Nevada, the minimum you should have is $10,000 while in California it’s $5000.
While purchasing the minimum state-required coverage will ensure you can legally drive on the road, it may not be enough to cover you, in case you cause an accident.
For example, you may hit another person’s car, causing damage valued at $10,000. Assuming you live in California and you had only purchased the state’s minimum coverage of $5,000, you will have to pay the $5,000 difference out of pocket.
On the other hand, if you had chosen a limit of $15,000, your property damage liability coverage will be enough to pay for those repairs.
Combined Single Limits vs. Split Limits
Liability coverage is available either as combined single limits or as split limits. If you opt for a combined single limit, then your insurer will pay out a maximum amount of money, which will cover all liabilities.
Therefore, if you cause a car accident and you have chosen a combined single limit policy, then your insurer will pay a combined amount, which you will then split between the bodily injury liability coverage and property damage liability coverage.
Simply put, the maximum amount your insurer will pay will be split between all the affected parties in the car accident that you caused.
As for split limits, the coverage will be divided into the different liability areas, which are bodily injury per person, bodily injury per accident and property damage.
Combined single limits tend to provide more liability coverage, compared to split limits. They are ideal for people who have more assets to protect since it eliminates the need to carry an umbrella policy.
If you cause a car accident and you have a combined single limit, your insurer will divide your liability limit amount as need.
For instance, if the accident results in little bodily injury and a high amount of property damage, then your insurer will dedicate the bigger portion of the claims to the property damage payouts.
However, it’s important to note that if you opt for a combined single limit, then you should be ready to pay high premiums.
Underinsured Motorist Coverage
While you may be the safest driver on the road, you still face the risk of getting involved in a car accident with another motorist.
And if that driver doesn’t have adequate insurance to cover the resulting expenses, you may be forced to shoulder the burden, leading to a strain on your finances.
This is where underinsured motorist coverage comes in. It’s designed to protect you if you are involved in a car accident and the at-fault driver doesn’t have adequate car insurance.
How it Works
During a car accident, the at-fault driver’s liability insurance is supposed to compensate the other driver who is not at fault.
In this case, your insurer will contact the other motorist’s insurance for payment. In case the other driver’s liability insurance is not adequate to cover your expenses, then your underinsured motorist coverage will kick in and cover the deficit, up to your policy limits.
For example, assuming you have been involved in a car accident where you are not the at-fault driver, and your vehicle damage and medical expenses amount to $300,000.
If the at-fault driver’s liability car insurance can only cover up to $200,000, then you can file a claim for the balance under your underinsured motorist coverage. Your insurer will then cover the balance, up to your policy’s limit.
Currently, 14 states require drivers to carry underinsured motorist coverage. Even if it may not be required in your state, you should consider adding it to your car insurance policy.
Having it on your car insurance policy is a smart financial move. It will protect your finances if you are involved in a car accident and the at-fault driver doesn’t have adequate liability car insurance coverage.
Uninsured Motorist Coverage
Approximately 30 million drivers on the road don’t have car insurance. Unfortunately, if you are involved in a car accident and the at-fault driver doesn’t have insurance, you will have to bear the entire burden of repairing your car.
You will also have to cater for medical expenses, for both you and your passengers. While you may sue the at-fault driver, the case may take months or years to be concluded, meaning the compensation will not come as fast as you would want.
Uninsured motorist coverage is designed to protect your finances and give you peace of mind, in case you are involved in a car accident and the at-fault motorist doesn’t have auto insurance.
You may also be involved in a car accident and the at-fault driver opts to flee the scene of the accident.
If you have uninsured motorist coverage on your car insurance policy, then it will compensate you for your medical expenses and the costs of repairing your car.
Uninsured motorist coverage is currently required in 22 states countrywide. And as much as it may not be mandated in your state, it will be a smart financial move to add it to your car insurance policy.
Personal Injury Protection Insurance
If you’ve sustained injuries after a car accident, personal injury protection or PIP coverage may help to pay for your medical expenses, hospital bills as well as other costs, which may not be covered under your health insurance policy.
In case your medical expenses exceed your PIP limits, then your health insurance policy may come in and cover the additional expenses.
Unlike other types of car insurance, PIP will cover your medical expenses and other associated costs, regardless of whether you were at fault for the accident or not.
Like other types of car insurance, PIP coverage comes with limits, which is the maximum amount your insurer is legally obligated to pay you under a covered claim.
So, what does PIP car insurance cover? Personal injury protection covers a wide range of expenses such as:
Personal injury protection will pay for your medical expenses and treatments for you and your passengers, for injuries sustained during an accident. It covers medical expenses such as:
- Surgical treatments
- Emergency care and ambulance fees
- Optometric and dental care
- Psychological and psychiatric care
- Prosthetic devices
- Medical supplies
- Audiological and speech services
PIP coverage follows the driver. Therefore, it will extend to you, even when you are not driving your car.
For instance, if you are hit by a car while walking, riding a bike or traveling as a passenger in another person’s car, your PIP coverage can help to cover your medical expenses.
If the injuries sustained from a car accident have made it impossible for you to engage in productive work, then PIP car insurance may help to replace lost wages.
The amount you can claim for lost wages under PIP car insurance will be limited to your policy. But in most situations, insurers tend to reduce the amount owed to the policyholder by approximately 20%.
Also, your compensation for the lost wages may be reduced further, if you receive social benefits such as social security disability insurance or workers’ compensation.
Essential or Substitute Services
If the injuries sustained during the accident have made it impossible for you to undertake necessary or essential services, then you may be forced to hire people to do that work.
And when you do that, your PIP car insurance may reimburse you the expenses incurred when hiring people to do that work. Some of the essential services that PIP may reimburse you for include:
- House cleaning
- Lawn mowing
- Child care
- Doing laundry
- Shoveling snow
Personal injury protection coverage may also reimburse for funeral expenses if someone covered under the policy dies due to injuries sustained from a car accident. The reimbursement amount depends on an individual’s policy limits.
Medical Payments Coverage
Medical payments or MedPay is a type of car insurance, which may help to offset the medical expenses of you and your passengers if injured during a car accident. It may also extend to relatives living in your home.
Medical payments coverage will cover the medical expenses, regardless of whether you were at fault or not. It may cover medical bills like ER visits, doctor visits, chiropractic services and X-rays.
Unlike PIP car insurance, MedPay will not pay for lost wages, replacement services, or medical treatments that are not related to the car accident.
Medical payments coverage is not offered in any of the 12, no-fault states. So, if you live in any of the no-fault states, then you may be required to purchase PIP car insurance.
Should You Purchase Medical Payments Coverage
Furthermore, MedPay is always optional coverage. So, if it’s available in your state, then you decide to purchase it or not.
Whether to purchase it or not will depend on the health insurance coverage that you have.
For instance, if you have a decent health insurance policy, which can provide coverage for car accidents, and you can comfortably afford its deductible, then you may not need to purchase MedPay.
Also, if you already have PIP car insurance whether it’s mandated in your state or you decided to buy it, then there is no need to add MedPay to your car insurance policy.
On the other hand, if your health insurance policy doesn’t cover car accidents or you chose a high deductible, then you should consider adding MedPay to your car insurance policy.
Furthermore, if you don’t have insurance cover for funeral expenses, then you can bridge this gap by adding medical payments coverage to your auto insurance policy.
Collision insurance is a type of car insurance coverage, which helps to pay for a car’s repair or replacement costs if it’s damaged after colliding with another car or stationary objects like a fence or tree.
While collision insurance is not required in any state, you may be forced to purchase it if your car is leased or financed. But if your vehicle is paid off, then you can purchase it as optional coverage.
What Does Collision Car Insurance Cover?
As noted above, collision car insurance usually helps to repair or replace a car, if it’s damaged during the following situations:
- Collisions with other cars, RVs, and motorcycles
- Hitting a stationary object like a street sign, phone pole, guardrail, garage, house, tree, or mailbox
- Damage caused by hit-and-run accidents
- Single-car accidents like overturning your vehicle or falling over
Collision Coverage Deductibles
Collision car insurance comes with a deductible, which refers to the amount of money you will have to pay before your claim kicks in.
You will be asked to choose your deductible when you are buying this type of car insurance. Deductible amounts range from $0 to $2,500.
If you opt for a lower deductible, then you should expect your premium to be on the higher side. On the other hand, if you opt for a higher deductible, then your premium will be lower.
Is Collision Car Insurance Worth It?
As noted earlier, collision car insurance is an optional coverage. So, should you add it to your car insurance policy? The answer to this will depend on whether or not you can afford to repair or replace your car.
For instance, if your car rolls over or you hit a telephone pole due to poor road conditions, could you afford to repair or replace your car? If the answer is no, then you should consider buying collision coverage.
While it may increase your car insurance premium slightly, it will save you from paying thousands of dollars, if your car is totaled or damaged during a collision.
On the other hand, if you are driving an old or inexpensive car, then it’s highly likely your collision deductible will be almost equal to the cost of repairing your car.
For example, if your car is valued at $2,000 and your deductible is $1,500, then the maximum amount your insurer will pay you is $500 for a covered claim. In such a situation, collision car insurance may not be worth it.
Furthermore, if your vehicle is rarely driven, then you may not need collision car insurance.
For a vehicle in storage, you should instead opt for comprehensive coverage, which will protect your car against fire, vandalism, glass breakage as well as weather-related damage.
Comprehensive coverage is a type of car insurance, which helps to repair or replace your car if it’s damaged in a non-collision-related incident or accident.
Comprehensive car insurance will also help to replace your vehicle if it’s stolen and not recovered. Some of the losses covered under comprehensive car insurance include:
- Natural disasters like hail, tornadoes or hurricanes
- Vehicle damage by animals
- Falling objects
- Civil disturbances such as riots
Comprehensive Car Insurance Deductibles
Similar to collision car insurance, comprehensive car insurance also has a deductible, which is the out-of-pocket amount you will pay for a covered claim.
For example, if you choose a $1,000 deductible and a branch falls on your car leading to damage worth $2,500, then you will pay $1000 and your insurer will pay the remaining $1,500 towards the car’s repair costs.
Unlike collision car insurance, you cannot choose the coverage limit for this type of car insurance. Instead, your insurer will use the actual cash value of your car or its fair market value to determine your coverage amount.
For instance, if your car is stolen and not recovered, then your car insurer will reimburse you for your car’s actual cash value, minus the deductible, as opposed to the amount of money you purchased it.
Hence, if you would like to replace the stolen car with the current year model, then you will have to top up the reimbursement amount you’ve received from your insurer.
Is Comprehensive Car Insurance Worth It?
Just like collision insurance, comprehensive car insurance is optional. So, should you add it to your car insurance policy or not? The answer will depend on various scenarios.
First, if your car is leased or financed, then there is a high chance your lender will require you to purchase both collision and comprehensive car coverages until you’ve paid off your vehicle.
Second, if your car is fully paid off, you need to ask yourself whether you can afford to repair or replace it if it’s damaged during a wreck.
If you cannot afford to repair or replace it out of your own pocket, then you should consider purchasing comprehensive car insurance.
Third, if you live in a hazardous area where your vehicle is likely to be vandalized, stolen, or damaged by natural disasters like tornadoes and hailstorms, purchasing comprehensive car insurance will be a smart choice.
Therefore, whether you should purchase comprehensive car insurance will depend on the car’s ownership status, what it would cost to repair or replace it as well as the risks that you face in your area.
Rental Reimbursement Coverage
Rental car reimbursement coverage is a type of car insurance, which will cover your rental car costs when your car is being repaired under a covered claim.
Apart from reimbursing rental car expenses, this car insurance may also cover your transportation costs, if you opt to use a cab, or public transportation means. Unlike other types of car insurance, rental car reimbursement doesn’t have a deductible.
You should note that rental car reimbursement coverage will only cover your rental car expenses, if your car insurance company is paying for the repairs, mainly under collision or comprehensive car insurance.
Some car insurance companies will only allow you to purchase rental reimbursement coverage if you have comprehensive and collision coverage.
How Rental Car Reimbursement Car Insurance Works
If you have added this coverage to your car insurance policy and your car is being repaired under a covered claim, you will have two options when it comes to renting a car.
First, you can opt to rent the car through your preferred rental car company. If you opt for this approach, you will pay for the rental car out of pocket, and then send the bill to your auto insurer for reimbursement.
Some people prefer this method since you are at liberty of choosing a rental car that aligns with your needs.
Second, you can opt for your car insurer to arrange a rental car on your behalf. This method is more convenient than the first one since your insurer will handle everything.
All insurance companies that offer rental car reimbursement coverage have established working relationships with at least one major rental car company. Therefore, there is a high chance you will get a better rate compared to renting a car yourself.
But regardless of the method you choose, rental car reimbursement coverage has daily and coverage limits, meaning your auto insurer will not cover your rental car costs indefinitely.
Rental car reimbursement coverage goes for approximately $30 to $50 per day, with a 30-day limit. So, if you have purchased a $30 per day policy for 30 days, then your insurer will only reimburse you a maximum of $900 per incident.
If you have enrolled your car in ridesharing companies like Lyft or Uber, then you may need to purchase rideshare insurance cover.
Some people who drive for ridesharing companies assume that their car insurance policy and the rideshare company’s insurance policy will provide adequate coverage.
However, this is not always the case. First, if your app is on and you are waiting for a request, then your personal car insurance policy will not apply.
Furthermore, your rideshare company’s insurance policy will only kick in, if you are involved in an accident when you have already picked a client.
Simply put, there is a gap between your personal car insurance coverage and your rideshare company’s liability coverage. And this is where rideshare insurance comes in.
It helps to bridge this gap, meaning you will not pay from your own pocket if you are at fault for an auto accident when your app is on but you haven’t accepted a request yet.
If your car is totaled or damaged beyond repair, you may file a claim under your comprehensive or collision car insurance.
But as highlighted earlier, your insurer will only reimburse the vehicle’s actual cash value.
So, if you had purchased the vehicle via financing, then you may still owe some money on the vehicle, beyond what your insurer has reimbursed you.
As its name suggests, gap insurance is designed to cover this difference. It will bridge the gap between what your car is worth and what you still owe on the lease or loan if the car is declared a total loss.
For instance, you may purchase a new Honda Accord via financing, for approximately $25,000 and you currently owe $20,000.
If that car is totaled, its actual cash value may be only $18,000. Assuming that your deductible is $1,000, you will only receive a compensation of $14,000 under your comprehensive coverage.
If you have gap insurance, it will pay the remaining $6,000. If you didn’t have gap insurance, then you will have to pay the balance out of pocket.
New Car Replacement Insurance
New car replacement insurance is designed to ease the financial burden of having to replace a new car if it’s declared a total loss.
Under normal circumstances, if your car is totaled, your insurer will only reimburse you the depreciated value of the vehicle.
But with new car replacement insurance, you will receive an amount that is enough to replace the totaled car, with a new one of a similar make and model.
However, most insurers will only allow you to add this coverage to your current car insurance policy if your car is only a few years old.
About THE AUTHOR
I've spent many years selling cars, working with auto detailers, mechanics, dealership service teams, quoting and researching car insurance, modding my own cars, and much more.Read More About Charles Redding