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Types of Car Insurance

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In general, auto insurance policies fall into one of three categories—liability, personal insurance, and coverage for your car. Though you'll need to meet the minimum requirements of your state, your plan can be customized with benefits based on your personal and financial needs. Depending on the kind of car you have, the coverage you want, and what you can afford to pay, you might pick one type of insurance or create a full coverage policy that involves a mix of all three.

Liability Insurance

Liability insurance is a type of plan that pays other drivers and their passengers for expenses related to injuries or damage that occurred as a result of an accident you caused.

All states except New Hampshire require some level of liability insurance. Even in no-fault states, where medical expenses are typically paid for by someone's own insurance, at-fault drivers can still be sued if the injuries are especially bad. Liability insurance can help cover expenses such as lawyers' fees and any damages you owe.

The minimum requirement for liability insurance varies by state, but it's recommended to buy as much additional coverage as you can afford. Liability plans are typically broken into 3 separate tiers:

  • Bodily injury (BI) liability per person: The maximum amount of medical expenses that your insurance will cover for each individual hurt in an accident
  • BI liability per incident: The maximum combined amount that your insurance will pay in total medical expenses to all other individuals involved in a single incident
  • Property damage (PD) liability: The maximum amount your insurance will pay to repair or replace another person's damaged vehicle or property for each incident

Liability insurance is listed to reflect the limits in thousands of dollars per person, per incident, and for property damage, in that order. So, for example, liability insurance listed as 25/50/25 covers up to $25,000 for injury per person, $50,000 for injuries per accident, and $25,000 for property damage.

Uninsured and underinsured motorist coverage

Another type of liability insurance covers other drivers who either aren't insured or don't have enough insurance, which can be a large percentage in some states regardless of the laws.  Uninsured and underinsured motorist insurance are often bundled together and pay you and your passengers for costs related to injuries or sometimes damage caused by a driver who doesn't have insurance or doesn't have enough to meet the cost of your claim. This kind of coverage can also be useful in hit-and-run accidents where the other driver is unknown. Uninsured and underinsured coverage is required in some states and optional in others.

Personal Insurance

Traditional liability insurance covers the cost of damage you caused to other drivers and their passengers, not to yourself and yours. If you're involved in an accident and you or your passengers get hurt, your medical bills could be really expensive. That's where personal coverage covers in.

Personal injury protection (PIP) and medical payments coverage

PIP and medical payments coverage are used to cover the cost of medical expenses for you and your passengers regardless of who's at fault. They can also be used to cover injuries obtained if you're a passenger in someone else's vehicle or if you're hit by a car while you're walking, running, or biking.

Though your health insurance might cover much of your medical expenses, these plans can help fill in the gaps and be used to pay for deductibles and copays. Depending on your exact plan, you might even be able to apply benefits to non-medical costs that arise due to an accident, such as lost wages, childcare, or funeral fees. Personal protection coverage is usually required in states with no-fault insurance systems because it pays for your injuries first despite whoever is found to be at fault.

Insurance for Your Car

If you get into an accident, your car breaks down, or you have a certain type of vehicle, coverage for your car can help you get back on the road without significant expense to you. There are many different types of policies that cover everything from collisions to rental reimbursement to roadside assistance.

Collision coverage

Collision insurance pays to repair or replace your vehicle whether you caused an accident, someone else hit your car, or your vehicle hit an object such as a pothole or tree. No state requires drivers to purchase collision insurance, however it's often required by lenders and leasing agents to protect their investments.

It's important to understand that the highest amount of reimbursement you'll receive under collision insurance is the actual cash value (ACV) of your vehicle, which typically equals the replacement cost minus depreciation. If the cost to repair your vehicle exceeds the ACV, your insurer will declare your car a total loss or "totaled." In that case, you'll receive the ACV amount, minus your deductible.

Comprehensive coverage

Comprehensive insurance covers all those other things that could damage your car than an accident with an object or another driver. It can pay for repairs or replacement needed due to things such as:

  • Extreme weather events
  • Natural disasters
  • Fire and flooding
  • Collisions with animals
  • Vandalism
  • Falling trees, branches, or other objects

Most insurers bundle collision and comprehensive insurance together. As with collision insurance, comprehensive plans typically aren't required by the state and will only pay out up to the actual cash value of your car.

Gap insurance

Gap insurance covers the difference between the value of your car and the amount you owe on an auto loan or lease. If you financed or leased your vehicle and you get into an accident in the first few years, the settlement you receive based on the cash value of your car might be less than what you actually still owe. This is because cars' values depreciate quite quickly over time, losing about 20% of their value in just the first year.

Gap insurance is recommended if your auto loan is financed for at least 5 years, you made a down payment that covered less than 20% of the vehicle's value, or if you're leasing your car.

Roadside assistance

If your car breaks down, roadside assistance—often known as towing and labor coverage—can be there to help. With this optional benefit, you can get help with things such as jump starts, tire changes, lockouts, fuel replacement, and towing.

Some policies automatically include this benefit while others need to be bought separately. In addition, some policies have limits on where and how far you can be towed. In some cases, you might have to pay the fees upfront and then submit a claim for reimbursement.

Rental car coverage

Rental reimbursement insurance covers the cost of a rental car while your primary vehicle is being repaired after an accident. This can be especially useful if you rely on your car for daily transportation to work or other commitments. However, for rental car coverage to be valuable, the price of the plan should be less than what you'd pay for renting a car on your own, especially if you have access to rental car discounts.

Classic car coverage

If you're the owner of a prized vintage car, classic car coverage can offer a larger settlement benefit than typical plans. However, these also come with rules and restrictions that aren't part of other policies, such as how often you can drive the car, where you store it, and if you maintain it to a certain condition.

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