Types of car insurance

Cars are among the most expensive purchases we’ll ever make, and while they offer exceptional convenience in our everyday lives, they also pose some risk for injury. That’s what makes car insurance so important. Whether it’s your vehicle, your passengers, or your finances at risk, insurance can step in to offer protection in the event of an accident. 

Most common types of car insurance

Most states require drivers to carry a minimum level of car insurance, but for many drivers, minimum coverage may not be enough. A more comprehensive car insurance policy can help pay for expensive damage and injuries resulting from serious accidents, as well as theft, vandalism, hit-and-runs, and more.

Below are some of the most common types of car insurance and what they cover.

Liability insurance

Liability car insurance is one of the most basic and important types of coverage. Nearly every state requires drivers to carry some level of liability coverage. Liability insurance typically helps pay for damage to other drivers’ vehicles (property damage) and to other drivers and their passengers (bodily injury), as well as non-household passengers in your vehicle, if you cause an accident. 

Your state has laws that specify how much liability insurance you are required to carry. For example, Texas drivers must have a policy with 30/60/25 limits. That means $30,000 for bodily injury per person, $60,000 for bodily injury per accident, and $25,000 for property damage per accident. In contrast, Florida drivers are only required to have $10,000 in property damage liability. Bodily injury liability is not required.

For better financial protection, you can always purchase a policy with extra coverage and even higher limits for an added cost.

It’s important to note that:

1. Liability coverage does not cover damage to your vehicle or injuries sustained by you or members of your household who are passengers in your vehicle.

2. State-required minimum liability coverages often have low limits. If you’re in an accident that damages multiple expensive cars and/or causes injuries to multiple people, the bare minimum coverage may not be enough to pay for everything. If you can afford to get coverage with a higher limit, it’s a good way to protect your finances.

Uninsured/underinsured motorist coverage

Uninsured/underinsured motorist coverage protects you in the event that you’re in an accident with a driver who does not carry insurance, or whose insurance policy limits are not high enough to pay for the damage and injuries they caused. Both uninsured and underinsured motorist coverage typically have bodily injury and property damage elements, much like liability coverage.

Many states require some form of uninsured and/or underinsured motorist coverage. Check the requirements listed on your state’s Department of Motor Vehicles website or speak with a licensed insurance agent to determine the coverage types and amounts you need.

Medical payments (MedPay) coverage

Medical payments coverage, also known as MedPay, can cover medical costs if you or your passengers are injured in an accident. The coverage can extend to ambulances, doctor visits, surgeries, X-rays, and even paying your health insurance deductibles and copays.

MedPay is generally optional coverage, and it’s not available in every state.

Personal injury protection (PIP)

Personal injury protection, or PIP, is another car insurance type that pays for qualifying medical costs following an accident. However, PIP goes a bit further than MedPay. For instance, personal injury protection may also cover:

• Lost wages

• Services to help with tasks around the house

• Rehabilitation

PIP is optional in some states and mandatory in others. Like MedPay, PIP isn’t available in every state.

Collision coverage

When coupled with comprehensive coverage (more on that next), collision coverage is part of a full coverage car insurance policy. Collision insurance covers damage to your vehicle regardless of fault, whether in a collision with another vehicle or with objects such as trees, fences, telephone poles, and guard rails. Collision coverage also covers damage from potholes, vehicle rollovers, and hit-and-runs.

You’ll have to pay an agreed-upon amount of damage out of pocket, called your deductible, before coverage kicks in when making a collision insurance claim. The lower the deductible you select for your policy, the higher the premium you will pay for collision coverage.

Comprehensive coverage

Comprehensive coverage is another part of a full coverage policy and essentially covers damage to your vehicle not covered by collision, regardless of fault. That means comprehensive insurance covers losses due to:

• A collision with an animal

• Theft or vandalism

• Damage from natural disasters and fire

• Damage from falling objects or debris kicked up by other vehicles

Like collision, comprehensive claims require paying your deductible. 

Most insurance experts agree that a well-rounded auto insurance policy includes both collision and comprehensive coverage, even though these coverage types aren’t required by law. To note, if you purchase a car with an auto loan, your lender may require you to carry collision and comprehensive insurance as a term of the loan. The same goes for leased vehicles.

Additional types of car insurance

Depending on where you live, what you drive, and which insurance company you choose, it might make sense to add optional car insurance coverage types to your policy, such as:

• Gap insurance: Guaranteed asset protection insurance, or gap insurance, is an optional coverage that would help pay off the remainder of your auto loan if your vehicle is stolen or determined to be a total loss following a collision. A total loss (commonly called a totaled car) means the cost to repair your vehicle would be more than the value of the car pre-collision.

• New car replacement coverage: New car replacement coverage protects you against depreciation. If you total your vehicle and have this coverage, it would help you buy a new similar vehicle. Without it, your policy would pay out the depreciated value of your vehicle pre-accident, which is unlikely to be enough to buy a brand-new model.

• Rental car reimbursement: If your vehicle is damaged and will take some time to repair, you may need a rental car in the meantime. This coverage helps pay for the rental, up to your policy limits.

• Roadside assistance: If your car breaks down, you get a flat tire, you run out of gas, or something else interrupts your driving, you can get help if you have roadside assistance.

• Rideshare insurance: Rideshare coverage is a specialized type of car insurance you may need if you drive for a rideshare company, like Lyft or Uber. Without it, your insurer might not cover damage or injuries that occur while you’re on duty.

• Custom parts and equipment: This optional coverage is designed to protect financial investments made in enhancing or customizing a vehicle. It can help drivers recoup losses related to damage or theft of custom vehicle enhancements like wheels, rims, sound systems, lift kits, paint jobs, and more.

Do I need car insurance?

Nearly every state requires some level of basic liability car insurance. Even in the states that don’t, it’s a good idea to carry it. If you’re at fault in an accident and don’t have insurance, you will likely be on the hook for vehicle and property repair costs, as well as medical bills and related expenses. If you can’t pay out of pocket, you could face legal and financial consequences.

If you’re leasing or financing a vehicle, you may be required to carry additional coverages, such as collision, comprehensive, and gap insurance. Carrying these, even when you aren’t required, can help alleviate the financial stress of an expensive vehicle accident.

How to choose the right type of car insurance

Ready to purchase car insurance? Here’s how to choose the right type for you:

• Research state requirements: First and foremost, look up what your state requires for minimum coverage. Insurers can also help you navigate this when you get a quote in person, over the phone, or online. Plus, they are not permitted to sell you a policy with less coverage than your state requires.

• Check finance or lease requirements: If you don’t own your vehicle outright, the lender or lessor may have specific insurance requirements you must abide by.

• Review your budget: Calculate how much you can afford to spend on premiums (aka insurance costs). Typically, you can pay in monthly installments or pay for a six-month or 12-month policy in one lump sum (which could earn you a discount). Also, determine how much you’re comfortable spending on a deductible in the event of a claim. If you choose a higher deductible, your policy premium will be cheaper. But striking the right balance between an affordable premium and affordable deductible is crucial.

• Consider optional coverages carefully: Although you may not be required to carry MedPay coverage, uninsured/underinsured motorist coverage, gap insurance, or roadside assistance, it’s worth considering which optional coverage types you may benefit from. For instance, if you’re a one-car family, it might make sense to add rental car reimbursement — that way, you know you’ll have a vehicle to drive even if yours is being repaired.