Understanding Car Insurance in the United States: Coverage Types Explained
Regarding car insurance, several different types are available to drivers in the United States. Each type of insurance offers different levels of coverage, so it’s important to understand the options before selecting a policy. In this article, we’ll break down the different types of car insurance available and what they cover.
Liability Insurance
In most places, you have to have liability insurance on your car simply because the law says so. It pays for any harm you cause to other people or their property while driving your car. Liability insurance is made up of two parts: property damage liability and bodily harm liability. If you are at fault in an accident that hurts someone, bodily harm liability pays for their medical bills and lost wages. If you cause damage to someone else’s property in an accident, like a fence or another car, your property damage responsibility will pay to fix or replace it.
Let us say you were driving down the street and hit another car by mistake, damaging both of them. You can get liability insurance, and if you cause damage to another driver’s car or hurt their passengers, your insurance company will pay for it up to the limits of your contract. Your liability insurance, on the other hand, will not pay to fix or replace your own car. That would be collision or comprehensive insurance duty.
Collision Insurance
No matter who was at fault, collision insurance will pay to fix or replace your own car if it gets damaged in an accident. There is no rule that says you have to have this kind of insurance, but if you have a car loan, your lender may make you. If you have a newer or more expensive car that would cost a lot to fix or replace, collision insurance is even more important.
As you drive your car, let us say you hit a guardrail on the side of the road by mistake. Your car gets a lot of damage from the hit, like a broken front bumper and a dented hood. It does not matter who was at fault in an accident if you have collision insurance. Your insurance company will cover the cost of fixing or replacing your car, subject to the limits specified in your policy. If you didn’t have collision insurance, you would have to cover the repairs yourself, which could be quite costly.
Comprehensive Insurance
Comprehensive insurance covers damage to your car that was not caused by an accident, like damage from theft, crime, or natural disasters. Also, this kind of insurance is not needed by law. However, if you have a car loan, your lender may make you get it. To protect your car from theft and other damage, you should get full coverage insurance if you live in a high-crime area or park your car outside.
Let us say you leave your car parked on the street outside your apartment building overnight. When you wake up the next morning, your sound system has been stolen. As long as your policy limits allow it, if your sound system is stolen and you have comprehensive insurance, your insurance company will pay to replace it. Comprehensive insurance will also pay for damage to your car caused by things other than a crash, like a tree falling on it, floods, or a fire. If you did not have comprehensive insurance, you would have to pay to fix or replace your stolen stereo system or pay for any damage that was not caused by an accident.
Personal Injury Protection (PIP)
Personal injury protection, or PIP, pays for your medical bills and missed wages if you or a passenger is hurt in an accident, even if someone else was at fault. Some states only offer PIP, and in those places, it may be required by law. PIP insurance can be very helpful if you do not have health insurance or if your insurance has high copayments or deductibles.
Let us say you are driving and someone else is at fault for a crash. You and your passenger were both hurt in the crash and need to see a doctor. Your insurance company will pay for your medical bills and missed wages if you and your passenger have personal injury protection (PIP) insurance. This is true no matter who was at fault for the accident. PIP insurance might also pay for other costs connected to the accident, like getting to and from medical visits. If you do not have PIP insurance, you and your partner would have to pay for your own medical bills or count on your health insurance to cover them. This could mean that your deductibles and copayments are very high.
Uninsured/Underinsured Motorist (UM/UIM) Coverage
If you get into an accident with a driver who does not have enough insurance to pay for your losses or none at all, uninsured/underinsured motorist coverage will protect you. There is no rule that says you have to have this kind of insurance, but your state may. It can be very important to have UM/UIM coverage if you live in a place where a lot of people do not have insurance.
Imagine a scenario where another driver runs a red light and collides with your car, causing serious injuries and significant damage. When you compare insurance quotes, though, you find that the other driver either does not have any insurance at all or does not have enough to cover the damage and hospital bills.
Should you have UM/UIM coverage on your own car insurance, you could file a claim with your own insurance company to pay for the hospital bills and damage that the other driver could not pay for. Your insurance company may pay some or all of your costs, up to the policy limit, depending on how much UM/UIM coverage you have.
You can choose to add UM/UIM coverage to your car insurance policy, but it can be very helpful if the other driver is not covered or does not have enough coverage.
Gap Insurance
Gap insurance pays the difference between how much you still owe on your car loan and how much the car is worth if it gets stolen or damaged in an accident. If you owe more on your car loan than the car is worth, you need this kind of insurance. Lenders often need gap insurance for people who want to buy a new car.
You just bought a new car for $30,000 and put down $5,000 as a down payment. You also paid off the last $25,000 over the course of 5 years. But a few months after you buy the car, you get into an accident, and your insurance company says the car is a total loss. The insurance company figures out that the car is only worth $20,000 on the market right now.
Your car insurance will pay out the $20,000 that the car is worth on the market right now, but you still owe $25,000 on your car loan. This is where gap insurance comes in. If you have gap insurance, it will pay the difference between how much your car is worth (the insurance payment) and how much you still owe on your car loan.
If you had Gap Insurance, it would cover the $5,000 difference between the amount your insurance paid out ($20,000) and the amount you still owe on your car loan ($25,000). This would let you pay off your loan in full and get a new car if you wanted to.
Most of the time, people who bought or leased a new car should get gap insurance to protect themselves financially in case they total the car.
Towing and Labor Coverage
Towing and labor coverage will pay move your car away if it breaks down or gets stuck on the side of the road. It will also pay for any work that needs to be done, like changing a flat tire or jump-starting your battery. You do not have to get this kind of security, but some comprehensive policies may do.
Let us say you are going along and your car breaks down on the side of the road. You try to start the car but it won’t. What is wrong? Talk to your insurance company about towing and labor coverage. If you have it, they will send a tow truck to take your car to a mechanic.
Once your car is at the garage, your Towing and Labor Coverage may also pay for the work that needs to be done to figure out what is wrong and fix it. No matter what kind of coverage you have, your insurance may also pay for a rental car while yours is being fixed.
If you have Towing and Labor Coverage on your car insurance, you will not have to pay for the tow truck, the mechanic’s work, and the rental car out of your own cash. Your insurance company will pay for those costs up to the limits of your policy.
You do not have to get Towing and Labor Coverage if you do not want to, but it can be a good thing to have if you want to feel safe on the road.
Keep in mind that different states have different insurance standards. To find out what kinds of coverage are required in your area, talk to your local DMV or insurance company.