What Are The Different Types Of Car Insurance?

Did you know that 12.6% of all drivers are uninsured? The Insurance Information Institute estimates that 1 in every 8 drivers nationally is driving with no insurance.

Choosing the right car insurance is paramount in ensuring you are protected on the road, regardless of whether everyone else is or not. Insurance can be confusing and it’s challenging to know what policy you need. Here is what you need to know about the different types of car insurance.

Liability Coverage

The first major type of car insurance is liability coverage. Liability is made up of bodily injury and property damage coverage, both of which are required by most States to meet financial responsibility requirements. Bodily injury coverage pays for any damage you may cause to another person, whereas property damage pays for the damage to the car or object you hit.

Many auto insurance companies offer bodily injury as a per person/per accident limit, such as $50,000 per person/$100,000 per accident. It can also be purchased as a combined single limit, such as $100,000 per occurrence. Property damage coverage is offered as a single limit as well.

Liability coverage is the least amount of insurance one can buy and it should be purchased by anyone who owns and operates a car. Without liability coverage, any damage you cause to another person or car would be paid for out of pocket. With the average auto liability claim for bodily injury at $20,235 as of 2022, that’s a significant amount of money to have to pay.

Comprehensive Coverage

Comprehensive is an optional coverage that pays for damage to your car caused by certain events. Also referred to as “other than collision” coverage, it pays for damage caused by such perils as fire, theft, vandalism, glass breakage, and collision with an animal. There is a deductible associated with comprehensive coverage, which means you have a slight out-of-pocket cost before insurance kicks in.

While it’s an optional coverage and not mandated by the state, it is most often required by banks if you finance or lease your car. Along with collision coverage, comprehensive is best suited for those who are still making payments on their car, or have a car that is newer and more costly to repair or replace. I typically recommend reviewing the value of your car to determine whether you could afford to replace it if it were destroyed in an accident and using that as a basis for your decision to purchase or not.

Read More: What’s the difference between Comprehensive and Collision insurance?

Uninsured Insurance / Underinsured Insurance

Remember the statistic of uninsured drivers? This coverage is what would protect you against that. Uninsured motorist coverage pays for damage to yourself or your car if you are hit by someone who doesn’t have insurance. This is also the coverage that usually pays for your damages if you are involved in a hit-and-run accident.

While similar, underinsured motorist coverage is slightly different in that it pays for damage to you or your car if caused by someone who doesn’t have enough insurance. Suppose, for example, you are hit by someone who carries the bare minimum liability limits required by the state. If your damages exceed their limits, underinsured motorist would kick in to pick up the difference.

Both uninsured and underinsured motorist are essential in protecting yourself and passengers, as well as damage to your car. Although not often required by law, each coverage should be purchased by anyone driving a car to ensure they are not left paying for damages they didn’t cause.

Collision Coverage

Simply put, collision coverage is what pays for damage to your car in an accident. Like comprehensive, it is optional coverage and not required by the state. However, if you finance or lease your car, your bank will usually require you to purchase collision on your vehicle.

A deductible is required here as well, so you should choose one you can reasonably afford if you need to file a claim. Insurance companies settle claims on an actual cash value basis, which means they consider the depreciation of the car. For this reason, you should know how much your car is worth.

I suggest collision coverage on cars that are less than ten years old, currently financed or leased, and are of higher value, like a sports car. Collision is one of the most expensive parts of an auto policy, so you should consider how much you want to pay upfront versus what it would cost you to repair or replace your car out of pocket.

Read More: Do I Need Collision and Comprehensive Insurance on an Old Car?

Personal Injury Protection

Personal injury protection or PIP provides medical coverage to you and anyone in your car if you are injured in an auto accident. One of the unique parts of this coverage is that it covers you regardless of who is at fault. For example, you can collect PIP benefits if you are responsible for the accident or not.

Beyond medical expenses, personal injury protection coverage usually provides additional benefits such as lost wages and funeral expenses. In addition, it protects you as a pedestrian. This means that if you were hit by a car as you were walking or riding a bike, your PIP coverage may cover your medical expenses.

It is not available in every state, however. There are only 12 states that require PIP:

• Delaware
• Florida
• Hawaii
• Kansas
• Massachusetts
• Michigan
• Minnesota
• New Jersey
• New York
• North Dakota
• Oregon
• Utah

And only 7 additional states where it’s available, but not required:

• Arkansas
• Kentucky
• Maryland
• South Dakota
• Texas
• Virginia
• Washington

If you live in one of the above states,  it’s recommended you purchase this coverage.

Medical Payments Coverage

If you don’t live in a state that offers PIP coverage, don’t worry. A similar coverage is offered called medical payments. Medical payments coverage will pay for damages you or anyone in your car incurred due to an accident. This coverage is available regardless of who is at fault.

Unlike PIP coverage, med pay does not usually cover lost wages or death benefits. It may also be duplicate coverage if you have health insurance. However, you should also consider your passengers. If they are injured in your car, medical payments would be available to them, whereas your health insurance will not.

If you have health insurance, you may think med pay coverage is one to forego. But I would not recommend doing this. It’s relatively inexpensive to add to your policy and can really come in handy should you or anyone else get hurt in your car. If you don’t have health insurance, medical payments is a must to ensure you have coverage for vehicle-related injuries.

Gap Coverage

As mentioned previously, insurance companies will pay the actual cash value of your car in an accident. This means that if you buy a brand-new car and crash it as soon as you drive off the lot, you might be reimbursed a lesser amount than what you paid for it due to depreciation. This can be problematic if you lease or finance your vehicle.

Suppose you finance a car for $30,000 but the actual cash value of the car is $25,000. If you get into an accident and your car is totaled, your insurance company is only going to pay $25,000. An additional $5,000 would still be owed to your bank for the lease or loan.

This is where gap coverage comes into play. Gap coverage covers the “gap” between the actual cash value of the car and what you owe on a lease or loan. While it’s an optional coverage and not required, it’s strongly recommended for those making payments on their car. Studies show that the average car depreciates 33.3% over a five-year period, so gap coverage is often worth purchasing.

Classic Car Insurance

While some cars depreciate as they age, others are modified or restored which can appreciate the value. Most standard insurance carriers do not differentiate between the two. Classic car insurance allows customers to insure their car on an appraised value and not actual cash value to ensure they are getting what their car is worth if the car is totaled.

You should consider purchasing classic car insurance if your vehicle is between 10-50 years old, considered to be collectible or vintage, and in good condition. The definition of a classic car may vary by state, so it’s important to check local laws to confirm your car meets those requirements.

Ride-Sharing Coverage

Most insurance companies specifically exclude coverage for ride-sharing. So if you drive for Uber or Lyft to make some extra cash, you could be paying out of pocket in an accident. Fortunately, more companies are beginning to offer ride-sharing coverage, which would pay for damages that occur while you’re on the clock.

Ride-share coverage should be purchased by anyone who drives for a ride-sharing company. While the company itself offers limited coverage, adding a ride-sharing endorsement to your auto policy significantly broadens your coverage by eliminating potential gaps between the company-provided policy and your own.

Towing Coverage

Although car insurance is not intended to be used for wear and tear scenarios, many companies offer towing coverage to help with vehicle breakdowns. Typically, a limit is chosen, such as $50 per disablement. When you need a tow, you call a towing company and submit your receipts to your insurance company and you will be reimbursed up to that amount.

Towing coverage is usually inexpensive and a good addition to your policy, especially if you have an older car that is prone to breakdowns. Just note that towing claims do count against your policy and too many can cause a company to cancel or non-renew. So if you anticipate needing to use this coverage often, you might want to obtain the coverage elsewhere, such as an auto club.

New Car Replacement Coverage

Because insurance companies settle claims on an actual cash value basis, you may think you’re out of luck if you buy a brand-new car. This is not the case if you add a replacement coverage endorsement onto your policy. New car replacement coverage updates the loss settlement on your vehicle to replacement cost, where depreciation is not considered.

This coverage is not offered by all insurance companies and can be costly to add by the companies who do. New car replacement coverage should be purchased if you have a high-value car and want to ensure it is replaced without depreciation.

Rental Reimbursement Insurance

If you are involved in an accident and you are unable to use your car, or if you need alternative transportation while the car is being repaired, you’ll need rental reimbursement coverage. Companies offer per day/per limit options, such as $30/$900. This means that the company would pay $30 a day, up to a $900 limit for a rental car.

It’s important to note that this coverage is most commonly used when you are at fault for an accident or if you are involved in a hit-and-run. If someone hits you and they are determined to be the responsible party, their insurance company will typically pay for your rental car. But rental reimbursement is an important coverage to include on your policy if you don’t have access to other cars and need one if your car is not drivable because of an accident.

Emergency Roadside Assistance

Some insurance companies offer emergency roadside assistance as optional coverage to their insureds. This coverage pays for roadside emergencies such as towing, flat tires, tire changes, and delivery of gas. It’s similar to having a membership with an auto club, but generally less expensive.

Similar to towing coverage, each incident counts as a claim made against your auto policy. So if your car is older and you anticipate having to use this service often, you may want to consider a different option. On the other hand, if you would like this service for emergencies only and don’t plan on using it frequently, it may be beneficial to add.

SR-22 Insurance

Drivers considered high-risk or ones who have had major violations, such as a DUI may be required by their state to carry SR-22 insurance. An SR-22 is proof of an individual’s financial responsibility. They will be notified if your insurance policy cancels, lapses, or remains active. Think of it like the state’s way of checking up on you!

The SR-22 may make it more difficult for you to find an insurance carrier to insure you, and the ones that do will charge you more for your policy than they would otherwise. But for the drivers that are required to carry an SR-22, you won’t be able to drive without it and it’s necessary to purchase.

Mechanical Breakdown Coverage

Car insurance policies don’t usually provide coverage for things such as mechanical breakdowns or other disablements that aren’t related to a certain covered event, such as an accident. However, some companies do offer mechanical breakdown coverage which would pay for some of these disablements. Similar to a car warranty, it would cover mechanical or electrical failure.

The companies that offer this coverage will generally have some guidelines that your car needs to meet. For example, cars older than a certain age and over a specified mileage may not be eligible. If your car is prone to breakdowns and your vehicle is eligible, you may want to purchase this coverage.

Commercial Auto Insurance

A personal auto policy is what a consumer typically buys for their personal vehicle. But if you use your car for any sort of business activity, you will want to purchase a commercial auto policy. Commercial auto policies provide coverage for cars that are used for business.

While both policies cover bodily injury and property damage caused to another person or object, commercial auto policies also provide coverage for employees and offer higher liability limits. This type of policy is best suited for those that drive certain types of cars, such as tow trucks, or taxis, cars owned by a business entity, and used for business.

Non-Owner Car Insurance

Insurance typically follows the car an individual happens to be driving. But what if you don’t own a car? For those that don’t own a car but may have one available to them, a non-owner car insurance policy is ideal. If you are utilizing car-sharing services, loaning cars from your family and friends, or renting cars, this policy is for you.

A non-owner car insurance policy covers you as a driver, regardless of what car you drive. Similar to a standard auto policy, coverage is provided for bodily injury or property damage you cause.

Personal Umbrella Insurance

A personal umbrella policy extends liability above and beyond what your personal lines policy would cover, including your auto. Say, for instance, you don’t have an umbrella policy and you have an auto policy with limits of $50,000 per person/$100,000 per accident for bodily injury. If you cause an accident and the injured party’s medical bills are $100,000, you would be responsible for paying that additional $50,000 out of pocket. With a personal umbrella policy, the additional $50,000 would be covered.

An umbrella policy is recommended for insureds that own a number of assets they want to protect.  A $1,00,000 umbrella policy usually costs between $200-$250 annually for someone who owns 1 home and 1 auto. For such a minimal amount of money, the extra peace of mind is worth it!

Which Type of Coverage is Required by Law?

Each state has its own laws regarding what is required for car insurance. For example, Florida drivers are required to carry at least $10,000 property damage & $10,000 personal injury protection. Whereas, Massachusetts requires at least $20,000 per person/$40,000 per accident for the same coverage.

Regardless of where you live, most states will ask that you maintain liability insurance to protect yourself and others on the road. Remember that liability insurance consists of bodily injury and property damage and you will often need to purchase at least these two coverages to meet these requirements.

Different coverages are required if you finance or lease your car. In these cases, your lender or bank will ask that you purchase what is typically referred to as “full coverage”. Full coverage means that you have both comprehensive and collision coverage on your car. They want to protect their interest in the car and ensure it gets repaired in an accident.

What Type of Coverage is Right for You?

With so many different types of coverages available, there is no “one size fits all” approach in which ones to choose. Different factors will determine what policies, coverages, and coverage limits will be appropriate for you. Being armed with information is the first step in deciding what you may need.

Consulting with a licensed expert is the best way to get exactly what you need. Research independent agents in your area and find one that you trust. These insurance professionals can get you on the right track!