Many people don’t know this, but by simply knowing about the many different types of auto insurance will not only help you save money on your car insurance policy, but it will make you a better and more educated consumer.
Buying car insurance can turn into an expensive proposition, especially if you don’t know what you’re buying or getting for your money. You are either buying a policy that you will never use, or you are not paying enough for the coverage that you need.
The trick is to choose the right type of coverage that is perfect for your needs and budget. And to do that, you need to know the many types of car insurance and how each may be perfect for you and your lifestyle.
We believe that knowledge is the most effective way to save a couple hundred bucks. Stop breaking the bank when it comes to purchasing motor insurance!
We also packaged this up into a nice infographic for you, so to view, download, or embed the full thing, just click here.
Types of Auto Insurance Coverage
If you caused an accident on the road (meaning the accident was entirely your fault), you are liable to pay for:
- The injuries sustained by the other party; and
- All property damage
In other words, you could be screwed. Can you imagine paying these in cash? The cost of injuries and property damage can be really expensive, and this is the reason why you should always carry liability insurance whenever you drive a car.
Every US state, with the exception of Mississippi, New Hampshire, and Virginia, requires liability coverage or casualty insurance as the absolute minimum. With that being said, it is illegal in many US states to operate a motor vehicle without liability coverage.
Liability insurance will cover bodily injury and property damage for the other party, but it will not cover injuries sustained by you and your passengers.
Liability insurance will not cover vehicle repairs or damages to your car, and in most cases, the coverage is very low.
Thus the reason why it is important to consider purchasing additional coverage for better protection.
To make things even more complicated, the laws vary state-by-state in terms of who pays for what, based on who is at fault (which itself is often tricky to determine.)
If you caused an accident, liability insurance will pay for the medical costs and property damage of the other driver. But who will pay for the damages to your vehicle?
Collison insurance will take care of all the expenses to either fix or replace your vehicle after a crash. The coverage includes damages after crashing into an object, crashing into another car, or if your car spins, rolls, or flips on the road.
In most US states, collision coverage is not a major requirement. But if you want to protect yourself from a huge financial loss after an unforeseen accident, having both liability and collision coverage will give you added peace of mind.
Comprehensive coverage is also called ‘Acts of God’ insurance because it covers vehicle damage that is not caused by a car accident. This type of coverage is designed to protect you and your wallet from significant repair bills caused by non-accident related claims.
Comprehensive coverage will protect your vehicle from:
- Falling objects
- Natural disasters such as earthquakes, floods, etc.
- Accidents caused by animals such as cows, deer, moose, bears, and even birds (whether you were hit by the animal or you accidentally hit them)
- Glass breakage
- Wind storm
- Riots and/or civil disturbances
You will need comprehensive coverage if you are:
- Leasing a car that requires a ‘full coverage’ policy
- Currently paying a brand new vehicle that requires ‘Full Coverage’ insurance
- Looking to protect your car from damages that are not covered by collision coverage
Auto insurance providers will typically offer collision coverage and comprehensive coverage in a single policy called ‘Full Coverage.’
In essence, ‘Full Coverage’ doesn’t really exist in and of itself. It is basically used to describe several types of car insurance policies meant to provide a complete level of protection against an accident, such as combining liability insurance, collision coverage, and comprehensive coverage. Since we cover the individual types of insurance in the above sections, we don’t get into too much detail about Full Coverage here. But if you want to read more, check out this excellent guide to Full Coverage Insurance.
Personal Injury Protection or PIP
Personal injury protection insurance will cover all your medical expenses in the event of an accident, no matter who is at fault.
This is the reason why PIP is popularly called ‘no-fault insurance’.
PIP is commonly the required insurance coverage on no-fault states such as Florida, Michigan, New Jersey, New York, Pennsylvania, and Puerto Rico. Keep in mind that the aforementioned states have verbal thresholds for PIP, which means that there is a certain threshold based on the insured party’s degree of injury (such as whole or partial loss of a body member) that must be exceeded before a lawsuit can be filed against the negligent party.
Other no-fault states includes Kansas, Hawaii, Massachusetts, Kentucky, Minnesota, North Dakota, and Utah. These states have a monetary threshold for PIP, which means that there is a certain threshold based on the insured party’s degree of injury (which is measured in dollars based on the medical costs incurred) before a lawsuit can be filed against the negligent party.
Depending on the policy, PIP may also cover child care, lost income claims, and funeral expenses.
Auto Medical Payments or Med-Pay
Most people think about coverage for vehicle damage when purchasing auto insurance. But your health and well-being is far more important than the damages to your vehicle!
Auto medical payments, or Med-Pay, will cover your medical expenses, including your passengers and other household members involved in the crash.
Med-Pay will also pay for:
- Injuries that you sustain as a pedestrian, or if you’re riding a bicycle and you get hit by a vehicle.
- Dental bills that came as a result of a vehicle accident.
- Funeral expenses.
Med-Pay insurance will also cover insurance deductibles and copays of other insurance policies, including PIP.
If your health insurance provides coverage against car accidents, there is no reason why you should purchase additional coverage like Med-Pay. Look into your medical policy before deciding if you should add Auto Medical Payments to your auto policy.
Uninsured/Underinsured Motorist Coverage
Uninsured or underinsured motorist insurance will protect you and your car from road accidents caused by other motorists who don’t have auto insurance (uninsured).
This is also used to cover your medical bills and car repair bills from offending drivers who don’t have sufficient insurance coverage (under-insured). This type of auto insurance is required in about half of all US states.
Uninsured motorist coverage or uninsured motorist bodily injury (UMBI) will pay for the medical expenses, pain and suffering, and lost wages of you and your passengers. The policy will also cover your medical expenses if you and your passengers were the victim of a hit-and-run incident. Uninsured motorist coverage may also cover property damage such as your house, your fence, and certain personal items such as your laptop and smartphone.
Underinsured motorist bodily injury (UIMBI) insurance will cover your medical payments when the offending party’s insurance is not enough to cover all your medical bills. However, if your underinsured policy limit is lower than the bodily injury liability coverage of the offending driver, then you will not receive any benefits.
Rental reimbursement policies will cover the cost of your rental car while your vehicle is being repaired after an accident.
Certain policies like collision and comprehensive insurance will usually come with rental reimbursement.
This type of auto insurance coverage is not usually required. But if you don’t have a secondary vehicle and you need to either go to school or work while your car is being repaired, it is good to have rental reimbursement as part of your car insurance policy.
Keep in mind that there is a per-day or per-accident limit on rental reimbursement coverage. For example, if the per-day limit is $35 and has an $800 per accident maximum, the coverage will only pay for the first $35 per day (so don’t get such an expensive rental car), and it will stop once your rental expenses have exceeded the $800 limit.
Emergency Roadside Assistance
Emergency roadside assistance will assist you in the event of:
- Flat tire or blown-out tire
- Dead battery
- Engine failure
- If your car runs out of fuel
- You left your keys inside your vehicle
- Your vehicle is stuck in mud or snow
Emergency roadside coverage will cover the cost of towing, changing the tire, fuel delivery, battery service, and locksmith services.
In addition to some auto insurance companies offering this roadside assistance and even some car manufacturers offering it to new car buyers, there are many companies that offer emergency roadside assistance, with AAA being the most popular in the United States.
Guaranteed Auto Protection or GAP
GAP insurance will pay for the cost of depreciation if you happen to wreck or total your vehicle after a crash.
For example: If you bought a new car for $20,000 and totaled it after 6 months, the insurance company will pay you around $17,000 after depreciation is considered. GAP insurance will cover the additional $3,000 lost due to depreciation.
If you happen to be involved in an accident while you are still paying for your car via an auto loan, GAP insurance will prevent you from continuously paying money on a car that was totaled, wrecked, or no longer fit for daily use.
Here’s another example: Let’s say that the purchase price of the vehicle is $20,000 and you make a $2,000 down payment. This means you took out $18,000 on your car loan. If you total the car after 6 months, and the insurance company estimates the fair market value (FMV) of your car at $14,000 while you still owe $17,000 on your car loan, GAP insurance will pay for the $3,000 difference between the FMV of the car and the amount left on your car loan.
Mechanical Breakdown Insurance
Mechanical breakdown insurance is usually better than paying for extended warranties because you pay small monthly premiums instead of a lump sum amount.
This type of insurance coverage will pay for major repairs to the engine, transmission, and other mechanical parts.
Mechanical breakdown insurance is usually available for new or leased vehicles that are less than 15 months old, or those with less than 15,000 miles on the odometer.
Keep in mind that not all these types of car insurance are required by your state, and some are only considered optional.
Now that you know the different types of auto insurance, you can now make an informed decision on what type of insurance to buy.
To download, embed, or view the full infographic for types of car insurance coverage, just click here for the full infographic.