When buying auto insurance, you need to know the differences between your coverage options. Understanding what different types of coverage are included in your policy can help you make better decisions about protecting your car and your assets.
There are three types of auto insurance coverage: liability, collision, and comprehensive.
Every state in the country requires that you carry liability insurance. Liability insurance covers you in the event that you cause damage to someone else’s person or property. If you are found at fault in an accident, your insurance will pay the cost of the damage done to property, as well as the bills associated with injuries to other parties.
Liability coverage protects you, since it can mean that your insurance company settles the bill for damages you cause, rather than you being sued. Check the minimum requirement for liability coverage in your state before proceeding. In many cases, the minimum requirement is rather low, so you might consider making sure that you buy a coverage amount that is sufficient for your situation.
Typically, liability coverage consists of 3 components:
These are often expressed as $50/$100/$50 — meaning each person involved is covered up to $50,000 up to a total of $100,000 per accident, plus up to $50,000 in property damage is covered. However, this coverage doesn’t cover your injuries or properties.
Liability coverage won’t cover your own injuries and damage to your car when you are in an accident. If you want your insurance company to cover damage to your own car as the result of an accident, you need to purchase collision insurance.
Note: Your medical bills, if you have any as a result of your accident, will need to be covered by your health insurance/major medical policy, or by an add-on option, e.g., “medical payments coverage” or “personal injury protection”.
Collision coverage is optional, but it is usually a good idea if your car is worth more than you can afford to replace easily. If you borrowed to purchase your car, the lender might require you to purchase collision insurance coverage for as long as you have the loan.
Collision insurance generally covers you if you hit another car, or if you hit a stationary object, such as a light pole. You are covered no matter who is at fault, although if the other driver is at fault for the accident his or her liability coverage should be used. If the other driver doesn’t have liability insurance, your own collision coverage can supply the needed pay out (and the the uninsured driver will face hefty state penalties).
As the name implies, collision coverage is only in effect if you are in some sort of accident. If you hit an animal, or if your car is damaged as the result of severe weather, fire, or theft, collision coverage won’t help you.
What you need in this case is comprehensive auto insurance coverage. Comprehensive coverage takes care of just about everything else that collision and liability don’t cover. If you live in an area where you might be prone to theft, or if you are likely to hit animals, comprehensive coverage can provide you with a peace of mind.
As with collision coverage, a lender might require you to carry comprehensive coverage during your loan. The lender wants to make sure that your car is covered, and that you will have the money to discharge the loan if something happens and your car is no longer drivable.
What coverage you choose largely depends on your situation, and your needs. Liability coverage is required in all 50 states, so you will need to get this coverage — and this is the coverage that you want to buy as much as you can afford to.
If you don’t have a loan on your car, collision and comprehensive coverages are optional. However, it can make sense to get these types of coverage anyway. These coverages pay you up to the current market value of your car, which takes into account things like the purchase price, age, and condition; minus your deductible. Typically, you can drop these coverages once the market value of your car drop below about $1,000, which is the maximum deductible you can get.
Note that it doesn’t cover the difference between what you currently owe on the car vs what your car is currently worth. You will need a gap insurance to take care of this difference.
Shop around for your coverage, choosing a company that offers reasonable rates and reliable coverage. Read up on the insurance company to find out whether or not you are likely to have your claim paid. You can usually get a discount if buy other policies, such as life and homeowners, from the same company.
Photo credt: Luis Tamayo.