Understanding Auto Insurance Coverage Types
We know most people only pay attention to auto insurance when it’s time to purchase or renew a policy. But understanding the auto insurance coverage types can actually help you make important decisions on your auto policy while ensuring you have adequate coverage.
Oh, and it can help you save money too.
If you’ve spent any time researching car insurance, you probably agree the insurance industry loves their jargon. Liability here. Collision there. These words all start to sound the same after reviewing your third or fourth auto insurance quote.
Today we’re putting together a list of the auto insurance coverage types for you. You’ll be ready next time you review your policy, whether working with an agent or purchasing completely online. We want you to be confident knowing exactly what you’re signing up for, without being confused by all the insurance terminology.
- How coverage types affect your premiums
- Additional tools to understand coverage
- The bottom line
Types of car insurance coverage
Let’s review the car insurance coverage types available.
Collision insurance is what covers your vehicle where there is damage from a collision with another vehicle, an object, or something falling onto your car. It also provides coverage for damage from potholes.
Collision pays for the repairs on your vehicle due to this type of damage, but only after you pay your deductible. It’s possible your deductible will be reimbursed if your insurance company can recoup it from the other driver’s policy (if it was the other driver’s fault).
Your auto insurance policy pays collision damage even if you’re at-fault for the accident. However, if the accident is the other driver’s fault, the insurer will go after the driver’s collision coverage to cover the costs.
Although it can vary state to state, collision is one of the coverages that you might not have to carry if your car is paid for outright.
Comprehensive insurance covers you when your car is damaged by something other than an accident. Examples of coverage are when damage occurs from:
- Storms and natural disasters
- Theft and vandalism
- Damage from fire
- Damage from hail
- Damage from flood
- Damage from animals, such as hitting a deer
- Damage from falling objects
Comprehensive coverage isn’t required by states. Be aware though, if you owe money on your car, it’s likely the lender will require you to add it to your policy — the lender wants to make sure its property is protected.
When you’re reviewing your car insurance policy, pay careful attention to what comprehensive coverage actually covers. The type of damage covered can vary from carrier to another.
Like collision coverage, comprehensive is another coverage your state may not require you to carry if your car is paid for in full and you own it.
Bodily injury liability
You will often hear liability as one category when talking about auto insurance, but in fact, it’s made of two components: bodily injury and property damage. Both are required by most states, although the minimum coverage varies from state to state.
Bodily injury liability provides medical payments for the other person injured in an accident and the accident is your fault. It does not provide payments towards your own injuries.
This type of coverage is for accidents caused by the policyholder and any family members also listed on the policy. You’ll sometimes see it listed as “BI” and it’s lumped in with property damage liability.
Generally speaking, most experts recommend carrying at least $100,000 in bodily injury liability per person, and $300,000 per accident. If you feel this isn’t enough, you can add more and you can also add a personal umbrella policy for further liability coverage.
Property damage liability
Sometimes listed as “PD,” property damage liability covers you for damage you caused to someone else’s property or vehicle. This also covers someone else who is driving your car with permission if they damage another vehicle or property.
This can mean damage to someone else’s car, but the coverage also includes damage to property like lamp posts, telephone poles, fences, structures, or buildings that were hit in an accident.
Property damage liability helps cover costs for expenses such as vehicle repair and replacement, damage to buildings, and repair and replacement of the stationary objects damaged.
Both types of liability coverage are required, although the minimum liability amounts can vary from state to state.
Medical payments coverage covers medical care costs for you, any passengers, or any family members in the car as the result of a car accident. This is coverage no matter who is at fault for the accident.
Medical payments pay for the gaps where your healthcare insurance won’t cover full costs, such as co-pays. Depending on the details of your policy, it could also help pay for doctor visits and rehabilitation for injuries due to the accident, lost wages, and funeral expenses if necessary.
In addition to co-pays, this coverage can help pay towards other medical expenses such as ambulance fees, additional nursing requirements, surgeries, x-rays, doctors and hospital visits, and prostheses.
This is optional coverage for your policy, but unless you have enough money in savings to cover a potentially enormous amount of medical bills and lost wages, then you should add it to your policy.
Personal injury protection (PIP)
PIP is similar to medical payments, however, it typically has higher comprehensive coverage, higher coverage limits, and the premium for it is higher. It also usually involves a deductible.
There are 22 states that require you to have PIP coverage. It also provides medical expenses, 60-80% of lost wages, and funeral expenses.
PIP kicks in before your medical payment or your health insurance payments.
Uninsured and underinsured motorists
Imagine being involved in a terrible car accident, only to find out the other driver doesn’t have car insurance. Uninsured motorist coverage is in place for this exact scenario and will reimburse you (the policyholder), a member of the family, or a designated driver if one of you is hit by an uninsured motorist or hit-and-run driver.
Underinsured motorist coverage works slightly differently but still protects you if the other driver doesn’t carry enough auto insurance. This coverage is used when the at-fault driver doesn’t have enough insurance to pay for the other driver’s total loss.
Uninsured motorist coverage also protects a policyholder if they are hit as a pedestrian.
Uninsured motorist coverage is required in 22 states and underinsured is required by 14 states.
Other types of auto insurance coverage
Along with the state requirements, almost all carriers give you the option to add specialty coverage to your policies. These additional coverages can range from practical to unnecessary, depending on your lifestyle and occupation. Ultimately, it’s your decision if adding something like this would be beneficial. Here’s a list of the more common options.
Car rental reimbursement
This optional coverage provides you with money towards a rental car if you’re involved in an accident and you need transportation. There is typically a limit to how much is paid towards the car rental, but expect it to be around $500 per incident.
Many insurance carriers have policies where they can “direct bill” a rental car company for you. This eliminates the hassle of you paying out of pocket for a rental car and waiting to be reimbursed. Check with your policy to see if this is a coverage option.
Emergency roadside assistance
This coverage takes care of you if you ever find yourself broken down on the side of the road or needing assistance with your car. This provides services such as towing, battery jumping, gas refill, fixing a flat tire, or if you’re locked out of your car.
GAP insurance, short for Guaranteed Auto Protection, is really pushed on new car owners who use a loan to purchase the car. This coverage is used if you owe more on your car than your car is worth to the insurance company. This gap coverage would pay the difference if you’re involved in an accident and total your car.
If you did purchase this coverage, you could save yourself money and drop it as soon as your car is paid off.
Check to see if your policy already covers the replacement of a windshield. If it doesn’t, then glass coverage is an option if you’re concerned about the cost of replacing your windshield. If you do opt for this coverage, go for one that doesn’t have a deductible so you won’t have to pay any money out of pocket.
Mechanical breakdown coverage helps cover the cost of big repairs on your car. Think of this as similar to an extended warranty.
Another option if you don’t want to include this on your policy is to make sure you have enough in savings to cover unexpected car troubles.
Pay-per-mile is designed for those who have a car that sits in the driveway or garage. This is where you pay for coverage on your car but you’re billed per mile, instead of for continuous use. A GPS is used to determine when you actually drive your car.
Umbrella coverage (or personal liability)
This is extra liability insurance that gives you additional monetary coverage above and beyond your current policy’s liability limits. So if you’re in an accident and someone decides to sue you, the umbrella policy would kick in to keep from touching your personal assets.
Not everyone agrees who needs to take on a personal umbrella policy. Some experts recommend purchasing more if your assets are greater than the limits of your policy. For instance, if you have a net worth of $300,000 but your policy liability limit is $100,000 per accident.
It’s also recommended if you’re in a well-known public figure or your assets are greater than $500,000. If you’re in a profession where you’re more likely to get sued (such as a physician) then it’s a must.
Umbrella coverage has other advantages though. It covers a wider scope of protection, such as slander or false arrests, which your liability doesn’t generally cover.
Did you know if you drive for Uber or Lyft, you can purchase additional coverage while you’re on the job? Rideshare coverage is usually additional liability coverage if your car is damaged or you damage someone else’s vehicle while you’re on the job. Some companies offer this option if you are a driver for meal delivery too (UberEats, DoorDash) so be sure to confirm the details on what time of gig is covered.
If you’re an aftermarket enthusiast, you may be surprised to realize many insurance companies don’t reimburse you if you’re in an accident and have to replace your custom accessories. If you have the custom equipment coverage, however, you would.
We’ve all seen the commercials touting the companies who offer accident forgiveness. There’s a reason this coverage is so popular — according to The Zebra, one accident can drive your premiums up 41%.
Although this coverage is optional, if you do have it on your policy, you could be “forgiven” for your first at-fault accident. Make sure you read the fine print though. Sometimes this coverage can take years to apply or may only apply for one policy term.
Who doesn’t like the sound of a deductible disappearing after a year or two? Actually, this optional coverage doesn’t quite work so easily. It usually starts off as a promise that after so many years of accident-free driving, your deductible is reduced.
Keep in mind, this is extra coverage you pay for — insurance companies aren’t offering this for free. And the moment you have an accident, the benefit is taken away. You need to carefully weigh the cost of having a disappearing deductible on your policy, versus the amount you could potentially save over several years.
How coverage types affect your premiums
As you can see, if you were to add all the requirements and optional coverages to your auto policy, it wouldn’t take long to rack up a serious bill each month.
With liability being the only requirement, this leaves a ton of room for you to customize your policy to fit both your driving habits and your budget.
It’s important not to skimp on coverage though. You need enough coverage to ensure you’re not financially devastated after an accident. Many options you can add to your policy are more for your convenience, rather than true financial hardship.
Also, don’t forget the role your deductible plays in your premiums. Your deductible is the amount you’re responsible for paying out of pocket before any of these insurance coverage amounts take effect. The lower your deductible, the higher your premium.
For instance, if you only carry a $250 deductible per accident, then your premium will be higher than if you had a $1,000 deductible. Raising your deductible from $500 to $1000 can save you as much as 13% on your premiums.
Additional tools to understand coverage
If you have an insurance agent you’re working with then the agent should be a resource for you when you have questions on coverage and options.
Another tool you might find helpful is Gabi. Gabi is an online service that compares auto quotes for you in an instant. Gabi is different from other sites because it uses your current policy information and gives you exact, head-to-head comparisons.
Gabi is super-quick because it relies on artificial intelligence to compare over 40 insurance companies at once. Not only can you see if you can get an improved rate on your premium, but you can also modify your options (like how much liability coverage you want) and see how it affects your quote.
Gabi only gets paid by insurance companies if you choose to purchase a policy through them. Gabi doesn’t make money off selling your information to people, so you’re getting unbiased recommendations and comparisons.
You can also read our full Gabi review here to learn more!
The bottom line
Taking a little time to understand the auto insurance coverage types can not only identify gaps in your own policy but might even help you spot potential savings. When you begin researching auto coverage, the terminology alone is enough to make your head spin. But you can take control of your finances and policy by learning a little bit of this “insurance language.”
We’re confident it won’t take you long to learn what you need and don’t need for your auto insurance. Soon you’ll be negotiating like a pro and feeling confident in your coverage.
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