7 Types of Car Insurance: How to Choose the Right One – If you’ve been left scratching your head about what your car insurance policy covers, you’re not alone. Basically, car insurance coverage is what you’re protected for if you get in a car accident. When you buy your policy, each coverage that you buy lists the damage it pays for.
You’ll see a wide range of coverage that insurance companies offer, but these are the 7 most common ones.
7 Types of Car Insurance: How to Choose the Right One
7 most common types of coverage When choosing coverage, start with what’s required by your state and your car loan, if you financed your car. Liability First off, almost all states require liability coverage. Liability is broken down into two types: bodily injury liability and property damage liability. Bodily injury liability pays for injuries to other drivers, passengers or even pedestrians if you’re responsible for an accident.
Property damage liability kicks in if you damage someone else’s property, like the other driver’s car. Liability also covers legal expenses if someone takes you to court. The limitations on your liability coverage Because all of these costs can get expensive, your insurance company puts a cap on how much it will pay, which is called a coverage limit. You’ll see your liability limits written as 50/100/50. The first two numbers show the maximum your insurance will pay for injuries.
Here, your insurance would pay $50,000 for each person injured, and a total of $100,000 for all injuries in the accident. The third number shows the maximum your insurance will pay for property damage, a.k.a. the other driver’s car.
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Here, insurance will pay up to $50,000 worth of car damage. So to recap, your insurance would pay $50,000 for each person injured, $100,000 total for all injuries per accident and $50,000 for the other driver’s car damage. Keep in mind that paying for someone else’s damage can get expensive, especially if there are several passengers or if you damage a valuable car like a Tesla or Porsche. So consider higher limits than your state requires like 100/300/100.
Another type of coverage that’s required by some states is personal injury protection — also known as PIP — this pays for your medical bills if you get injured in an accident, including health insurance copays or deductibles.
It may also pay for lost income if you’re out of work, as well as childcare, nursing care, housekeeping and other services until you recover. The exact expenses it covers depend on your state and insurance company. You’ll also see medical payments coverage offered, which is similar to PIP but it only pays for medical bills, not lost income. These types of medical coverage can be helpful if you have a high health insurance deductible. Next up, every state has drivers that drive without insurance, and that’s why you should consider uninsured or underinsured motorist coverage.
In fact, some states require it. Uninsured motorist coverage applies to your car repairs or medical bills if you get hit by a driver who doesn’t have enough insurance. So if the driver responsible only has $15,000 in property damage liability and your car is worth $20,000, underinsured motorist property damage can kick in to cover the rest of your car’s repairs. Uninsured or underinsured motorist coverage is also split up into two parts for injuries or property damage.
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So similar to liability coverage, you’ll choose the maximum that your insurance will pay for your car damage and your injuries, like 50/100/25.
Now we can move on to add-on coverage.
One add-on that many people choose is collision coverage, which pays for your car’s repairs if you cause an accident. Remember, if you’re the one responsible, your liability pays for the other driver’s car repairs, but it doesn’t kick in for your car. That’s where collision coverage comes in. Another add-on that drivers commonly buy is comprehensive coverage, although comprehensive here doesn’t mean wide protection.
Comprehensive coverage pays for car damage that’s not related to a collision with another car.
So, what does it pay for? Comprehensive kicks in for storm damage, vandalism, hitting an animal, a tree falling on your car or replacing your car if it’s stolen. If you have a car loan, your lender probably requires both comprehensive and collision coverage. If you don’t have a loan, you most likely need collision coverage, unless you have enough savings to replace your car on your own.
For comprehensive, think about how likely it is for your car to get damaged by a storm, vandalism or theft.
However, if you own an older car, buying comprehensive and collision might not be worth it if you’d pay more than your car is worth. Last but not least, many people buy gap insurance at the same time as buying a car. While you might benefit from gap insurance, it’s not always necessary.
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If you total your car in an accident, your insurance company pays out your car’s market value, which includes depreciation.
The problem is that, if your car loses value too quickly, your insurance check may not pay off your car loan.
So let’s say you buy a brand new car for $20,000 and it gets totaled a year later. At that point, your car might only be worth $16,000, and that’s what your insurance will pay. But if you owe $17,000 on your loan, you’ll have to pay the extra $1K out of pocket unless you have gap insurance. On the flipside, if your car is worth $16,000 and your loan balance is only $15,000, you’ll have money left over when you get the insurance check.
Since there’s no gap between what your car is worth and what’s left on your loan, you don’t need gap insurance.
You have a better chance of not needing gap insurance if you’ve made a big down payment or extra payments on your loan, or if you have a short-term car loan like two years. To recap, you need at least the coverage that’s required by your state and your car loan to hit the road.
But when looking at add-ons, everyone’s needs are a little different. To get the right level of coverage, think through the damage that’s most likely to happen, such as you causing a car accident or a storm damaging your car.
Then, balance getting protection for that damage with what you can comfortably afford.
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