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Auto insurance falls into two primary categories: required and optional coverages, each covering different types of expenses.
Required coverages include those mandated by state law and any insurance required by a lender or lessor, such as liability insurance, which covers expenses like personal injury to others when you’re at fault or damage to a vehicle. Optional coverages include collision and comprehensive insurance, which covers repairing a car you fully own, among other costs.
Learn how car insurance policies must follow certain requirements and can be tailored to fit your needs.
Key Takeaways
- Auto insurance offers several types of protection, depending on the type of insurance policy you have.
- Standard auto insurance includes liability coverage, or coverage for injuries or property damage when you are at fault.
- Collision and comprehensive coverage pays for damage to your vehicle and is usually required with leasing or when you have a car loan.
- Personal injury protection and medical payments coverage provide for medical costs and wage loss, among other costs.
What Does Auto Insurance Cover?
An auto insurance policy is a collection of several types of protections. State laws require drivers to purchase minimum insurance coverage, and lenders and leasing companies usually impose additional coverage for financed and leased cars.
Liability Coverage
A standard car insurance policy includes bodily injury and property damage liability coverages. When you’re at fault for an accident, bodily injury liability coverage can help pay the other driver’s and passengers’ medical bills. Property damage liability can help pay to repair or replace the other driver’s vehicle and repair costs for any damaged structures such as a fence or building.
States require automobile owners to carry minimum bodily injury and property damage coverage, but these amounts vary. Here are three examples:
| Bodily injury per person | Bodily injury per accident | Property damage per accident | |
|---|---|---|---|
| Alaska | $50,000 | $100,000 | $25,000 |
| California | $15,000 | $30,000 | $5,000 |
| Texas | $30,000 | $60,000 | $25,000 |
Your state’s minimum liability auto insurance requirements might not provide enough financial protection if an accident’s costs exceed your limits. A licensed insurance agent can help you determine how much liability coverage you need. In addition, in no-fault states, each driver’s insurance company pays for their insured’s injuries, regardless of who’s at fault.
Liability coverage doesn’t pay medical expenses for you or your passengers, nor does it cover your car repair or replacement costs.
Collision and Comprehensive Coverages
Collision coverage helps pay to repair or replace your car if it’s damaged in a covered traffic accident. If your vehicle gets damaged by fire, theft, or another non-collision event, comprehensive coverage helps to repair or replace it. Likewise, this type of coverage can help pay to repair a damaged windshield or replace a stolen automobile.
State laws do not require these coverages. But if you have a car loan or are leasing a car, you’ll typically be required to carry collision and comprehensive coverages until you’ve paid off the loan or the lease ends. If you drop these coverages, your lender may buy them for you and charge you for the insurance.
Personal Injury Protection and Medical Payments Coverages
Depending on your state, your optional or mandatory personal injury protection (PIP) may cover these costs no matter who’s at fault:
- Medical and hospital expenses: Often up to a percentage or a limit
- Wage loss: Income replacement
- Loss of services: Paying nonfamily members to do work such as household chores
- Funeral expenses: Covering a portion of your funeral costs
No-fault insurance states may have a minimum PIP coverage amount that you’re required to carry, such as a limit of $50,000 in New York.
Medical payments coverage, or med pay, can help pay the medical and/or funeral costs for you and your passengers, and potentially deductibles and co-payments not covered by your health insurance.
Uninsured and Underinsured Motorist Coverage
If a hit-and-run driver or a motorist without auto insurance wrecks your car, then your uninsured motorist coverage can provide coverage. This insurance helps pay the medical expenses for you and your passengers and costs to repair your vehicle. If an at-fault driver doesn’t have enough coverage to pay for your injuries or car damage, your underinsured motorist coverage can help pay the difference.
Typically, this insurance is bundled and listed as UM/UIM (uninsured motorist/underinsured motorist) coverage. Some states require drivers to carry uninsured motorist coverage in minimum amounts.
The term “full coverage” typically refers to a policy that includes all state-mandated coverages, plus collision and comprehensive insurance. However, there is no standardized definition of “full coverage,” so you may find coverage types and limits differ by insurer.
What Does Auto Insurance Not Cover?
A standard car insurance policy does not cover all types of losses. Sometimes, even a full coverage policy will only provide some of the protection you need. Typically, standard personal car insurance policies do not cover the following:
- Any difference between an insurance settlement and the car loan amount still owed
- A rental car while your car is being repaired following a covered accident, although in some states, you’re entitled to a rental car for a limited period if your vehicle was declared a total loss
- Mechanical breakdowns, roadside assistance, towing costs, and general wear and tear
- All-terrain, commercial, motorcycle, off-road, and recreational vehicles
- Cars driven for ride-sharing services such as Uber or Lyft or other business purposes
- Intentional damage
- Accidents while driving in Mexico or racing your car
Some renters’ or homeowners insurance policies may cover personal items stolen from your vehicle when your auto policy does not. Review exclusions in your auto policy contract.
Additional Car Insurance Coverage Options
Adding optional coverages to your policy can increase your protection. While some insurers offer a wide range of optional coverages, others provide only a few. Common optional car insurance coverages include:
- Guaranteed auto protection (GAP) insurance: If you total a vehicle, the insurance company offers a settlement based on its actual cash value. This value may be lower than the amount still owed to the lender. For example, the insurance provider may offer a settlement of $15,000 while you still owe the lender $18,000. Gap insurance can cover the $3,000 difference.
- Classic car insurance: Although new cars depreciate quickly, antique, classic, and exotic vehicles can increase in value over time. Classic car insurance lets you negotiate an automobile’s value with the insurer. Following a covered loss, this type of insurance can help pay the high cost of specialized repairs or restoration.
- Rental car reimbursement: If your car is damaged in a covered accident, rental car reimbursement coverage can help pay the cost of a rental car while yours is in the shop. However, if the other driver is at fault, that driver may offer you rental car coverage.
- Custom parts and equipment: Typically, standard auto insurance policies do not cover cosmetic modifications or equipment you’ve added, such as custom wheels or a navigation system. Custom parts and equipment coverage helps pay the cost of restoring your customizations following a covered loss.
- Rideshare or delivery driver coverage: If you drive for a transportation or delivery company, this coverage can help protect you and your automobile when the company’s insurance does not cover you—for example, while waiting for your next passenger or order.
- Roadside assistance: When you break down, roadside assistance coverage can help pay for flat-tire changes, fuel delivery, locksmith services, and towing.
What Type of Auto Insurance Do You Need?
The car insurance you need depends on state laws, lenders, and your unique needs and requirements. State laws and lenders require you to carry certain types and levels of coverage.
Most states’ mandated minimum bodily and property liability coverage doesn’t give adequate financial protection if an accident’s costs exceed your coverage. Increasing your limits helps safeguard your assets.
Comprehensive and collision coverage helps repair and replace your car if damaged or stolen, particularly if you’re the at-fault driver. Generally, you should drop collision and comprehensive coverages when your vehicle’s market value drops to a few thousand dollars. But you can also consider dropping collision and comprehensive coverages after paying off a car loan.
Car owners driving for delivery or rideshare services can add an endorsement to their auto insurance policy or buy a stand-alone policy. If you often drive your vehicle for work, find out if you’re covered under an employer’s nonowner auto insurance policy. If your employer does not carry nonowner coverage, ask your insurance agent if you need to purchase a commercial car insurance policy.
Which Type of Insurance Is Required by Law?
Most states require drivers to carry minimum levels of bodily injury and property damage liability coverages. Some require additional coverages, like medical payments, personal injury protection (PIP), and uninsured/underinsured motorist protection. If you’re unsure how much coverage you need, check with your state’s insurance department or motor vehicles department.
How Is Auto Insurance Priced?
Insurance companies determine your insurance premium based on individual factors, such as your:
- Personal characteristics: Age, marital status, gender, location
- History: Claims, coverage, and credit history, as well as your driving experience and record
- Vehicle: Annual mileage and vehicle type
- Coverages: Amounts, types, and deductibles
What Is an Auto Insurance Premium?
As outlined in the auto insurance policy contract, a car insurance premium is the amount you pay for a policy in exchange for coverage—for example, a $500 premium for a six-month policy term. Some insurers allow you to make monthly premium payments or offer discounts if you pay the entire premium up front.
What Is an Auto Insurance Deductible?
The deductible is the amount of money you must pay from your funds before the insurance company pays on a claim. For instance, if you file a $2,000 collision insurance claim and have a $500 collision deductible, the insurer will pay a maximum of $1,500.
What Is GAP Insurance?
Guaranteed auto protection (GAP, or gap) insurance covers the difference between an insurance settlement amount and the amount you still owe on a car loan. For example, if you total a vehicle and receive a $20,000 insurance settlement but still owe $25,000, a gap insurance policy would help pay the remaining $5,000.
The Bottom Line
An auto insurance policy offers you protection in several ways. Without insurance, if you’re at fault for an accident, the other driver could sue you for medical and property damage costs. When shopping for an auto insurance policy, consider state and lender requirements, vehicle use, and your budget. Car insurance’s financial protection outweighs a policy premium’s cost.
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