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. 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, like a fence or another car, your property damage responsibility will pay to fix or replace it.
Let’s say you were driving down the street and hit another car by mistake, damaging both of them. If you have liability insurance and 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’s 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’s say you hit a guardrail on the side of the road by mistake. Your car gets a lot of damage from the hit. 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.
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 required 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’s say you leave your car parked on the street overnight. When you wake up the next morning, your sound system has been stolen. 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.
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’s say you are driving and someone else is at fault for a crash. You and your passenger were both hurt and need to see a doctor. Your insurance company will pay for your medical bills and missed wages if you and your passenger have PIP insurance. This is true no matter who was at fault. If you do not have PIP insurance, you would have to pay for your own medical bills or count on your health insurance to cover them.
Uninsured/Underinsured Motorist (UM/UIM)
If you get into an accident with a driver who does not have enough insurance to pay for your losses or none at all, this coverage will protect you. There is no rule that says you have to have this kind of insurance, but your state may require it. 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 another driver runs a red light and collides with your car. You discover the other driver either has no insurance or not enough to cover the damage and hospital bills. Should you have UM/UIM coverage, you could file a claim with your own insurance company to pay for the expenses the other driver could not. Your insurance company may pay some or all of your costs, up to the policy limit.
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 totaled in an accident. If you owe more on your car loan than the car is worth, you need this kind of insurance. Lenders often require gap insurance for new car loans or leases.
You buy a new car for $30,000, and after your down payment, you have a $25,000 loan. A few months later, the car is totaled. The insurance company determines the car’s actual cash value is only $20,000. Your standard policy pays out $20,000, but you still owe $25,000. Gap insurance would cover that remaining $5,000 difference, allowing you to pay off your loan in full.
Towing and Labor Coverage
Towing and labor coverage will pay to move your car 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 include it.
Let’s say you are driving and your car breaks down. If you have towing and labor coverage, you can talk to your insurance company, and they will send a tow truck to take your car to a mechanic. Once your car is at the garage, this coverage may also pay for the labor needed to figure out what is wrong and fix it. You will not have to pay for the tow truck, the mechanic’s work, and a potential rental car out of your own pocket.
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.
If you want to purchase car insurance, you can read this article: How to Shop for Car Insurance: Tips and Tricks