Car insurance protects you financially in case you’re in an accident or your car is damaged or stolen. There are several different types of car insurance coverage out there, each of which serves a different purpose. Understanding the ins and outs of each type is essential to making smart decisions that protect you, your passengers, and your car.
Key Points
• Liability coverage compensates for damages to others and their property when you’re responsible for an accident.
• Comprehensive coverage is for non-collision damage, including vandalism, animal impacts, and natural disasters.
• Collision coverage covers repair costs for your car after a crash, subject to a deductible.
• Uninsured/underinsured motorist coverage protects against financial loss from accidents with inadequately insured drivers.
• Personal injury protection (PIP) covers medical expenses for you and passengers after a collision, regardless of fault.
Main Types of Car Insurance Coverage
There are four main types of insurance for cars: liability coverage, comprehensive coverage, collision coverage, and uninsured and underinsured motorist coverage. Here’s a closer look at each.
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Liability Coverage
Liability coverage helps cover the cost of damages to other people involved in an accident when you are at fault. So, for example, if you were to miss a stop sign and hit an oncoming vehicle, you would generally be considered at fault. Your liability coverage would cover the cost of repairs to the other driver’s car, their medical bills and lost wages, and other related expenses.
Most states require that you have liability coverage, though minimum car insurance coverage requirements will vary. California, for example, requires:
• $30,000 for injury/death to one person
• $60,000 for injury/death to more than one person
• $15,000 for damage to property
New York, on the other hand, has a very different set of requirements:
• $10,000 for property damage for a single accident
• $25,000 for bodily injury and $50,000 for death for a person involved in an accident
• $50,000 for bodily injury and $100,000 for death for two or more people in an accident
You may choose to carry coverage beyond the minimum requirement to protect yourself against costly accidents. For example, if you are covered for $10,000 in property damage in New York and you cause $20,000 in damage, your insurance will only pay for $10,000. You’ll have to come up with the rest yourself.
Comprehensive and Collision Coverage
Collision coverage helps pay for the cost of repair or damage to your vehicle if you are at fault in an accident. It will also help pay for damage if you hit an inanimate object, such as a building, tree, guardrail, or retaining wall. Collision coverage typically has a deductible that you pay out of pocket first. Then the insurance kicks in and pays the rest.
For example, if you have a $500 deductible and your car sustains $2,500 in damages, you’ll pay $500 and your insurance will cover the other $2,000.
No state requires collision coverage. But if you have an auto loan or lease, your lender or lessor will likely require you to have it.
There are situations in which you might consider doing without collision coverage. For example, if you own your car outright and it’s not worth much, it may be cheaper to pay out of pocket to repair or replace the car than it would be to pay a monthly premium.
However, if your vehicle is more valuable or you don’t have the money on hand to pay to replace it, you may want to add collision coverage to your policy.
Comprehensive coverage helps pay for auto damage outside of a collision. That damage could result from random incidents such as vandalism, hitting an animal, hailstorms, or a fallen tree branch. Again, if you have an auto loan or lease, those contracts will likely require you to carry comprehensive coverage.
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Uninsured and Underinsured Motorist Coverage
Unfortunately, not everyone on the road carries insurance. Even if they do, they may not carry enough to cover the cost of the damage caused by an accident.
That’s where uninsured and underinsured motorist coverage comes in. Several states require both types of insurance. These policies pay when the at-fault party’s insurance — or lack thereof — doesn’t.
What’s more, if you’re in a hit-and-run accident, you may be able to file a claim on your uninsured coverage. Make sure up front by checking the fine print on any policy you may be considering.
Without uninsured motorist coverage, if you get into an accident with an uninsured or underinsured driver that results in vehicle damage or bodily injury, you might have to pay for car repairs and medical care out of your own pocket.
Additional Types of Car Insurance Coverage
There are additional types of insurance for cars that you may want to consider. Some are optional add-ons, while others may be mandatory in your state.
Guaranteed Asset Protection (GAP) Insurance
If you have collision or comprehensive coverage and your car is totaled or stolen, that coverage will typically pay you up to the car’s depreciated value.
But what if you have an auto loan, or you lease, and you owe more on the loan than the depreciated value of your car? In that case, gap insurance can kick in and help you pay off your loan.
Personal Injury Protection (PIP)
PIP, also known as no-fault insurance, will help pay the costs associated with personal injury for you and your passengers, such as medical expenses, lost wages, disability, rehab costs, death benefits, and household services, such as child care or cleaning services. PIP covers you no matter who was at fault in the accident. This coverage is mandatory in some states and optional or unavailable in others.
Rental Car Reimbursement Coverage
Rental reimbursement is optional coverage that may help cover the cost of a rental car after an accident that leaves your own vehicle damaged and inoperable. To add this coverage to your policy, you’ll generally need to carry collision and comprehensive insurance as well.
Without this coverage, you might have to pay out of pocket for a rental car after an accident.
The Takeaway
Choosing the right car insurance is about protecting yourself financially and ensuring peace of mind while you’re on the road. By understanding the different types of coverage that are available, you can determine how much auto insurance you need and pick a policy to suit your needs and your budget. Revisit your policy regularly to make sure it still provides the type and amount of protection you need, so you can be prepared no matter what happens out there.
When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.
FAQ
What is “full coverage” car insurance?
“Full coverage” car insurance typically refers to a policy that includes liability, collision, and comprehensive coverage.
Should I get gap car insurance?
If you’ve leased or financed a vehicle, you may want to consider gap insurance. In fact, many lease agreements require it. If you have an auto loan, you might consider gap insurance if you made a small down payment, your loan term is 60 months or longer, or you purchased a car that depreciates quickly.
Do I need both comprehensive and collision coverage?
While you may not be required to have comprehensive and collision coverage, you may want to consider it anyway. Having both is especially worth looking into if you have a newer car or if you might not be able to pay out of pocket to repair or replace your vehicle.
Is PIP required in my state?
To find out if your state requires PIP, check the website for the state Department of Motor Vehicles.
What happens if I don’t have enough car insurance?
Not having enough car insurance can put you at financial risk. If you are the at-fault party in an accident and you don’t have enough insurance, you’ll be on the hook for the remainder of the cost for the damage you caused.
photo credit: iStock/asbe
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