The 4 Types of Car Insurance Coverage
What is Car Insurance?
Car insurance is actually one policy that can provide four different types of coverage. Let’s look at the four types of coverage you can get with auto insurance.
(1) Liability Insurance
Liability insurance is the foundation of all car insurance policies. It will pay for any expenses related to bodily injury or property damage -- for you and your car if you are the victim of an accident and for the other party and their car if you caused the accident. Conditions under which liability insurance won’t pay for bodily injury or property damage expenses are:
- If you intended to cause bodily injury or property damage
- If you damage your own property (since it is likely covered under a different insurance policy, i.e. personal property insurance)
- If you are renting the car out or giving it to an employee to use for business purposes
- If someone used the car without your permission.
When you are considering a car insurance policy, the liability limit (or the amount that the insurance company will pay for liability-related expenses) is listed as a series of numbers on the policy. Each number is in thousands of dollars. Let’s look at an example.
Let’s say that M. Doe’s insurance policy has a liability limit of 30/50/10
The first number, in this case 30 (which equates to $30,000) is how much your policy will pay in bodily injury coverage FOR ONE PERSON,
The second number, in this case 50 (or $50,000) is how much your policy will pay in bodily injury coverage total FOR EVERYONE IN THE ACCIDENT, and
The third number, in this case 10 (or $10,000) is how much your policy will pay for PROPERTY DAMAGE.
Each state sets a required minimum amount of liability coverage and most states require approximately 50/100/25 in liability coverage. That means that your insurance company would pay up to $50,000 in coverage for any single person you injured in the accident, up to $100,000 for everyone injured, and up to $25,000 for all property damage. Costs can add up very quickly and that minimum coverage can quickly be exceeded.
You are able to purchase more coverage – significantly more – to protect you from having to pay the costs associated with bodily injury or property damage as the result of your accident. In fact the good news is that the more coverage you buy the cheaper it gets – so you can get greater protection for an incrementally small increase in cost. Most insurance professionals recommend at least $300,000 - $500,000 in personal injury liability because medical costs can skyrocket compared to property damage.
If you want to have an extra layer of protection above what your policy offers you might want to consider purchasing an umbrella liability policy. After your insurance company has paid up to the limit on your standard liability policy, your umbrella policy pays any costs above and beyond the liability coverage you already have up to a specified amount. Umbrella policies are inexpensive considering how much protection they provide. For example, a $1 million umbrella policy will cost approximately $150 - $300 annually.
(2) Collision and Comprehensive Coverage
Collision and comprehensive coverage are two separate types of coverage for your car sold in one package:
- Collision coverage is exactly what it sounds like – it pays for damage caused to your car in an accident when you are “at fault.” It is typically the most expensive part of your car insurance bill. Collision coverage will pay to repair your car up to your car’s actual cash value (also known as “fair market value.”) That’s the actual value of your car at the time it was involved in the accident, not how much it would cost to replace your car. You can get an idea of your car’s value by using the “Kelley Blue Book” which you can find at most bookstores and public libraries, or through the online Yahoo! Auto site. You can also find information on car values through the National Automobile Dealers Association publication “Official Used Car Guide” which is published monthly.
When you are involved in an accident and need to get your car repaired, you will first have to pay your deductible and then the insurance will pay the rest. If it is going to cost more to repair your car than the car is actually worth, often the insurance company will “total” your car, meaning that it will write you a one-time lump sum check for the actual current value of your car instead of paying to repair it. It’s important to be aware that your car’s actual value can be significantly less than the cost to replace it so if you have a car loan outstanding (either to be financed or leased) then you should consider gap insurance to reimburse you for the difference between what you owe and what the car’s actual value is. Gap insurance pays you for the difference between what you owe on your car and what the insurance company says it is worth.
- Comprehensive coverage pays to repair your car when it is damaged due to something other than an accident, i.e. if it is stolen and recovered damaged, if you hit an animal, if it’s vandalized, etc. As with collision coverage, you will first need to pay the policy deductible and then your insurance company will pay the remainder allowed under your comprehensive coverage. The company will only pay to repair your car up to its fair market value.
(3) Medical Payments
Medical payments coverage, also referred to as “MedPay,” pays for immediate medical care required for you, family members or passengers in your car injured in the event of an accident, regardless of who is at fault. If someone else is responsible for the accident, your insurance company may first try to get that person’s insurance company to pay for the expenses before paying out on the policy.
(4) “No-Fault” and Personal Injury Protection (PIP) Insurance
Personal injury protection (PIP) and the broader “no-fault” insurance are expanded forms of medical payments coverage. That means that PIP and no-fault coverage will pay for expenses not ordinarily included in medical payments coverage, such as lost wages, child care payments, funeral expenses, pain and suffering, etc.
No-fault and PIP coverage requirements and coverage amounts vary by state.