Types of Auto Insurance

Types of Auto Insurance

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Unlike health insurance, car insurance policies are actually made of several types of coverage — each with its own costs and benefits. Motorists can often select different coverage amounts for the different components, so it's important to know what types of insurance are best for your own situation. Here's a review of the most popular types of auto insurance.

Liability car insurance

Liability car insurance helps financially protect the other party when you're at fault in a car accident. It includes two types of coverage: bodily injury (BI) and property damage (PD). BI pays for expenses that result from injuries sustained in an accident, while PD pays for damaged property. In order to drive in most states, motorists must have some form of liability coverage or demonstrate another form of financial responsibility. This is to ensure that drivers who hurt others or damage property can properly compensate the other party.

Liability insurance limits are typically written as three numbers in this format: 25/50/10.

A policy with 25/50/10 limits means your insurer will pay up to $25,000 for bodily injuries per person, up to $50,000 for bodily injuries per accident, and up to $10,000 for property damage. The policyholder must pay for any damage beyond these limits — so it's important to have sufficient coverage.

Bodily injury liability

Bodily injury liability coverage (BI) is the most common type of auto insurance because it's required in almost every state. It covers you in the event you cause an accident that injures or kills others. Your car insurance company steps in to pay for the other party's medical expenses, lost wages or funerals. BI even covers any legal fees you incur if the other party decides to sue you in court.

Protection is provided by your insurer up to the BI liability limits in your policy; any bills beyond that will be your responsibility. While most states require BI limits of $25,000, they can range from a low of $10,000 per person in Florida to a high of $50,000 per person in Alaska. You can increase your limits, as long as state law allows, but you should consider your budget and whether your assets would be at risk following an accident.

People usually get bodily injury liability and personal injury protection (PIP) mixed up. With PIP coverage, your insurance company pays for any injuries that happen to you or your passengers in an accident. (More on that below.)

Property damage

Property damage (PD) insurance covers damage that you may cause to someone else's property. As an example, if you lose control of your car and run into your neighbor's house, property damage insurance would cover the costs of repairs, up to your policy limits. Likewise, if you rear-end someone's car due to no fault of their own, property damage insurance would also cover that incident. Learn more about property damage liability here.

Each state determines the minimum amount of PD insurance each driver is required to carry. But remember, while it may be tempting to only comply with minimum PD coverage, you'll be responsible for any expenses that exceed your coverage limits.

One thing many people get confused about is whether property damage insurance covers your car. In short, it does not. To cover damage to your vehicle, you'll need one of the two physical damage car insurance coverages, which we'll discuss below.

Physical damage car insurance

When your vehicle is damaged in an accident or by a fallen tree branch, physical damage car insurance covers your repair costs. It consists of two types of coverages, collision and comprehensive, which are differentiated by the circumstances under which your car was damaged. These come with a deductible, typically ranging from $50–$2,000, that you'll need to pay before your coverage kicks in. The deductible you choose impacts your premium, with higher deductibles resulting in lower premiums and vice versa.

Collision coverage

Collision coverage is an optional insurance rider, although ValuePenguin recommends you include it in your policy. Collision insurance pays for repairs to your own vehicle if it turns out you were responsible for the accident. Even if you are the world's best driver and didn't cause the accident, there's always the chance you'll be ruled partially at-fault. If that's the case, you could find yourself in a legal battle trying to prove it wasn't your fault. In this scenario, collision coverage will pay for repairs to your car while the insurance company attempts to prove your innocence and get their money back.

When you're in a car accident that's another driver's fault, the property damage portion of the other driver's auto insurance policy would step in to pay for repairs to your own car.

Comprehensive coverage

Comprehensive car insurance, also referred to as "other than collision" or "comp" insurance, covers issues such as vandalism, theft and damage from natural disasters. Both collision and comprehensive fall into the "physical damage" category of car insurance incidents. Comp coverage covers all physical damage to your car not covered by collision. A common misunderstanding about comprehensive insurance is that it covers everything. It does not. It only covers automobile damages from noncollision accidents and will not cover personal items, such as your wallet or car radio, if they are stolen.

Rental insurance

Some insurance providers, such as AAA, extend liability insurance coverage to rental cars. Before paying extra for the rental company's car insurance, double check with your own insurer first. Keep in mind: This coverage is different from car rental reimbursement insurance, which is an optional coverage that pays for a temporary rental while your car is in the body repair shop.

No-fault or personal injury protection

Personal injury protection (PIP) pays for medical expenses for you and passengers in your car when you get into a car accident. It's also called "no-fault insurance" because it covers your injuries regardless of who is at fault in the accident. Beyond hospital expenses, PIP will sometimes cover lost wages, household expenses and even funeral costs. PIP is mandatory in some states, such as New York and Michigan, and optional in others.

In "at-fault" states, you'd have to file a claim or potentially sue the at-fault party's insurance policy. This drawn-out process can be less attractive, especially for people with tighter budgets. However, because PIP pays out for expenses regardless of who is at fault, premiums in no-fault states can cost a bit more. For more information on how this coverage works, and how much it can cost, refer to our personal injury protection guide.

Uninsured/underinsured motorist coverage

Most states require drivers to carry auto insurance liability protection, but there are still many motorists on the road without any insurance coverage. The volume of uninsured drivers varies in each state, typically ranging from 12% to 25%. Uninsured and underinsured motorist coverages step in when you're in an accident with an uninsured driver. This coverage is relatively low-cost and can be incredibly helpful in some cases. Some states include UM/UIM as part of the minimum required auto insurance.

Uninsured motorist coverage

Uninsured motorist coverage pays for your own medical expenses and car repair bills if you're hit by an uninsured driver. This may include hit-and-run accidents and cases where the driver stole the vehicle.

Underinsured motorist coverage

This covers your medical expenses and car repair bills if you're hit by a driver who doesn't have enough coverage to pay for the damage they've caused. If your claims exceed these limits, you can sue the driver for additional reimbursement — but in some cases, the underinsured driver may not have enough assets to pay. Underinsured motorist coverage will help cover the balance of medical bills or other expenses related to the accident.

SR-22/FR-44

SR-22, or FR-44 in some states, is not a type of car insurance, but it still merits some attention here. If you're caught driving without insurance or otherwise violate traffic laws, the state may require you to purchase car insurance and show proof of coverage. That proof is the SR-22 or FR-44 form, and your insurer will need to file it on your behalf.

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Mark is a Senior Research Analyst for ValuePenguin focusing on the insurance industry, primarily auto insurance. He previously worked in financial risk management at State Street Corporation.

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