Types of Auto Insurance

Types of Auto Insurance

Car insurance policies are actually made of several types of coverage — each with its own costs and benefits. Drivers can often select different coverage amounts for the different components to best fit what they need, so it's important to know what types of insurance are best for your own situation.

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Required types of 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 insurance 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.

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Bodily injury liability

Bodily injury liability coverage protects you in case you cause an accident that hurts or kills other people.

BI pays for other's medical expenses, lost wages and funerals, as well as your legals fees if they take you to court. Bodily injury liability coverage (BI) is the most common type of auto insurance because it's required in almost every state.

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.)

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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.

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.

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Uninsured/underinsured motorist coverage

One in eight drivers on the road is uninsured, with many others being underinsured and only carrying the minimum amount of insurance required by their state.

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.

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Personal Injury Protection (PIP)

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.

Twelve states require drivers to have personal injury protection, and it's optional in 38 other states. 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.

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Optional types of car insurance

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Collision and comprehensive coverage

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 insurance pays for repairs to your own vehicle if it turns out you were responsible for the accident.

Collision coverage is an optional insurance rider, although it is always recommended you include it in your policy if possible. 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.

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Gap coverage

Gap insurance, also known as guaranteed asset protection coverage, pays the difference between what you owe on your car loan and what you would receive from your insurance company after totaling your car.

Gap insurance is a great option if you owe more on your car than it's worth. Adding gap coverage could be a good idea if you would struggle to cover the hundreds or thousands of dollars that you would owe if your car is totaled.

Adding gap coverage bumps up your car insurance payment by around $50 to $250 per year, but it's much cheaper than opting for gap coverage through your car dealer or lender.

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Rental insurance

Rental reimbursement coverage is an optional add-on to your policy that pays for the cost of renting a car while yours is being repaired after an accident or claim. Sometimes rental coverage also reimburses you for transportation other than a rental car, like rideshares, trains or buses.

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Who is covered by car insurance?

An insurance policy covers the individual policyholder who purchases it. If multiple drivers regularly use the same car, or live together, policyholders should add these drivers to their insurance to ensure they’re also covered. If one policyholder drives multiple cars, they should add the cars to the policy so they're all covered.

Ever wondered who should be added to your car insurance policy? The answer varies from insurer to insurer, but as a general rule, add someone to your auto insurance policy if they live in your household, have a driver’s license and can regularly access your car. This includes:

  • Spouse or romantic partner
  • Teens
  • Family members
  • Nanny or babysitter
  • Roommate

Even if someone isn’t in your immediate family, add them to your policy if they frequently drive your car . Not adding them means you risk being denied coverage if they have an accident.

Ask your insurer who your policy covers before you let someone else drive your car. Some insurance policies only cover drivers specifically listed on the policy, while others have a permissive user clause. This clause guarantees coverage if someone else is driving your car in a one-off situation, such as if you loan your car to an out-of-town guest or ask a friend to drive you home from a party.

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What does car insurance not cover?

Car insurance doesn’t cover non-accident car repairs . In other words, insurers don’t offer coverage for repairs that aren’t the direct result of an accident. The only exceptions are if you have:

  • Mechanical breakdown insurance (MBI): This coverage functions like an extended warranty and provides coverage for major repairs such as bad brakes, a busted engine or transmission problems.
  • Car problems that result from an accident but emerge later.
  • Vehicle damage covered by a warranty.

Additionally, your insurer might not cover you if you use your car for business purposes, including driving for a ride-hailing service, unless you have commercial use coverage or rideshare coverage. Insurance companies make a distinction between personal and commercial use of cars. If you use your car to give rides or deliver food through services like Uber and Uber Eats, you have essentially turned your personal car into a business car.

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