If you’ve recently purchased auto insurance or you’re in the process of gathering car insurance quotes, you’re likely to be inundated with tons of options. It gets pretty confusing the further you get into, especially as you’re trying to separate what you must purchase versus what coverages are optional.
To add further complexity, nearly every state has a legal requirement for you to carry a minimum amount of auto insurance. Once you’ve met the requirements to drive, what's next legally? Do you keep adding coverages onto your policy, or is the bare minimum okay?
This is where you must make choices based on your personal driving history, circumstances, and budget and figure out how to customize an auto insurance policy to fit your needs.
Minimum requirements for auto insurance
Almost every state, except Virginia and New Hampshire, requires minimum liability coverage
. And even these two states still have strict financial requirements if you decide not to purchase liability insurance.
Liability insurance is divided into two parts:
- Bodily injury liability: This pays for the other driver's medical expenses if you are the at-fault driver in a vehicle crash. Bodily injury liability limits are set both per person and per accident.
- Property damage liability: This pays for expenses for property damage for other drivers if you are the at-fault driver causing a vehicle crash. Typically, this is repairs or a replacement of a vehicle, and the insurance limits are per accident.
Although states have minimum liability requirements, it is financially wise to make sure you have adequate liability coverage — almost always above the minimum — to protect your financial assets. Otherwise, if you don’t have high enough liability insurance limits, you could end up being financially responsible for expenses.
Other insurance requirements
Other states require liability insurance and mandate personal injury protection, uninsured and underinsured motorist coverage, and medical payments. So keep in mind while these are optional for most drivers, these coverages may be required where you live.
- Personal injury protection (PIP): This coverage pays for medical expenses no matter which driver is ruled at fault in an accident. It’s required in states with “no-fault” driving laws.
- Uninsured motorist (UM): This coverage provides medical expenses, lost wages, and pain and suffering for both you and your passengers if you’re involved in an accident with another driver without insurance.
- Underinsured motorist (UIM): Similar to UM, but this provides the benefits if you are involved in an accident with someone who doesn’t have enough insurance to cover the expenses.
- Medical payments (MedPay): This pays medical expenses for you and your passengers if you’re involved in an accident, regardless of who is at fault.
If you have questions about what is legally required in your state, it’s best to consult with your trusted license insurance agent. You can also find the information online with the Insurance Information Institute.
Even if your state does not require these coverages, it is still worth considering these options. Sometimes they are very inexpensive to add to a policy but offer greater financial protection and limit the amount of out-of-pocket expenses you would have to pay from an accident.
Comprehensive and collision coverage
In addition to the requirements and options listed above, another common question is if you need comprehensive and collision insurance. Understanding the difference between the two and what they provide is the best way to determine if you need this added to your policy.
- Comprehensive coverage: This covers repair or replacement to your vehicle caused by something other than a vehicle crash or collision with something. These are often completely out of your control, such as a hail storm, theft, vandalism, or flooding.
- Collision coverage: This also covers repairs or vehicle replacement if it is damaged due to colliding with another object. Getting in a vehicle crash or damage from a fallen object or hitting a mailbox are all examples.
The benefits from these coverages kick in after you’ve paid the deductible. You choose the amount of the deductible when you’re setting up your policy. It could range from $0 to $1,500 (the amount you pay out of pocket.) A higher deductible means less amount of impact on your car insurance rates.
It’s important to note while these are optional, most lenders require the purchase of these two coverages as long as you owe money on the vehicle. Once you own a car outright, you can decide if you want to keep comprehensive and collision or drop them off your policy.
Here’s where things start to get a little more confusing - and potentially expensive.
is a popular optional coverage almost every insurance carrier provides (for a fee). This service comes to your rescue when your car is inoperable from something like a lockout, flat tire, being stuck in a ditch, or a dead battery. The service will get you back on the road or provide a towing option.
Before you purchase: Before you add this option to your policy, check to see if you have roadside assistance coverage through another source. Perhaps you have a AAA membership you forgot about, or maybe one of your credit card companies includes it. You may also have coverage through your cell phone provider without realizing you’re paying for it each month.
Rental car reimbursement
Rental car reimbursement provides reimbursement for expenses related to renting a car due to damage to your own vehicle. If your vehicle is in the repair shop, or you need a replacement, and you need a rental car to get by, this pays towards the expense.
There is typically a daily limit for reimbursement, as well as a total claim limit. Some carriers work directly with rental car companies (Direct Billing), so you don’t even have to pay anything upfront.
Before you purchase: This optional coverage is usually only a few dollars extra per month. You should weigh the cost per month versus the amount you’d have to pay out of pocket to rent a vehicle. Leasing can get pricey, mainly if you live in a large city or need a larger vehicle to care for your family’s driving needs.
coverage pays the “gap” between your vehicle’s fair market value and what you owe on your loan. If your car is totaled in a car accident, the insurance carrier will offer you an amount based on the fair market value.
Vehicles automatically depreciate once they leave the showroom floor, this could leave a big gap between the payout and the amount you owe on the loan. This coverage covers the gap between the two.
Before you purchase: Don’t be surprised if you lease or finance your vehicle if you are required to purchase gap coverage — especially if you are driving a newer car. Also, consider how much your vehicle is expected to depreciate in your area. Not all vehicles depreciate the same amount.
New car replacement
New car replacement coverage is often confused with gap insurance. However, new car replacement helps you purchase a new vehicle if your current one is ruled a total loss from an accident. Gap insurance helps you pay off the loan of the old car.
If you have this coverage, you receive a replacement with a brand new vehicle of the same make and model. You only have to pay the deductible, and usually, comprehensive and collision coverage are also required alongside this option.
Before you purchase: Make sure this is available through the insurance carrier, or even in your state — this coverage does not have universal availability. The price can also vary, so be sure to get quotes from many carriers if you’re interested in this option.
If you drive for companies such as Uber or Lyft, you may be interested in this coverage. Although policies differ from carrier to carrier, it typically pays for expenses related to accidents while you’re “on the job.” Expenses might be repairs or medical payments, for instance.
If you use your vehicle for both personal and business use, this coverage could help cut down on the amount you pay out of pocket for expenses.
Before you purchase: Understand what your ridesharing company offers in terms of coverage and what your state legally requires before you add the rideshare option — which you may or may not need.
Custom equipment/sound equipment coverage
If you have custom equipment or expensive aftermarket sound equipment installed in your vehicle, you may be surprised to learn it’s not automatically covered if this equipment needs replacing after an accident. Custom equipment coverage will pay for this coverage in the event it needs replacing.
Before you purchase: This coverage is only necessary if you have installed aftermarket equipment. Not all policies cover aftermarket sound equipment, so make sure you know exactly what’s covered.
Classic car coverage is for antique, vintage, and classic cars. Not all insurance carriers offer this type of coverage, so you may have to shop around quite a bit. There are pretty big differences in this type of coverage versus traditional coverage. Usually, classic cars are insured with agreed value instead of actual cash value. This means the vehicle owner and insurance carrier agree to the value when writing the policy.
Classic car coverage may also impose usage limits and storage requirements for the vehicle, so be sure to read the fine print and make sure it’s something you’re comfortable with before signing.
Other options for further auto policy customization
As if you don’t have enough options to choose from, there are other programs worth mentioning to customize your policy further. While these may impact your premiums at first, you could end up saving more on your car insurance rates in the long run.
This popular program is now available through many insurance carriers. The concept is simple — you pay a little higher premium each policy term. If you happen to get in an accident, whether it’s your fault or not, then your rates will not go up because of the accident.
Safe driving discounts
Safe driving discounts are standard with almost every carrier. The caveat is, you have to connect to an app via bluetooth or install a telematics device in your vehicle. These are used to monitor your safe driving habits to see if you qualify for discounts. The end goal is lower car insurance rates.
The bottom line
When researching car insurance quotes or auto insurance companies and their policy options, you have many decisions to make. Once you meet the requirements, you can add on optional coverages.
If you’re looking for a way to truly customize your policy to fit your budget and your driving lifestyle, then you owe it to yourself to compare multiple carriers and the various coverage options. You may be pleasantly surprised at how much the rates and insurance discounts vary from one carrier to the next.