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Types of Car Insurance Coverage: Which Do You Need?

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Dana George
Author: Dana George
Dana George
Dana George
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Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.

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Choosing the best auto insurance can be frustrating, particularly if you're unfamiliar with the terms. Here, we'll give you a breakdown of different car insurance types, terms, and what they all mean. That way, you'll be ready when it's time to purchase your next auto policy.

What are the main different types of car insurance?

While there is no such thing as full coverage car insurance, there are six primary types of car insurance, each providing a different set of coverage. 

1. Comprehensive

Comprehensive coverage pays to repair or replace an auto if it's damaged by fire, falling objects, hail, flood, theft, or even hitting an animal. It also pays for windshield repairs. 

Having a comprehensive insurance policy is optional in most situations. The exception is if someone leases their car, in which case their finance company will likely require the driver to carry comprehensive coverage to protect them against loss. 

Comprehensive insurance goes with the driver. Say someone is driving a friend's car, hits a patch of black ice, and slides into a ditch. That driver's insurance coverage will pay to repair or replace the car they were driving, minus any applicable deductible. 

Here are some of the reasons to consider comprehensive coverage:

  • The driver lives in an area with a high rate of car theft
  • The driver lives in a region prone to natural disasters (like hurricanes, earthquakes, blizzards, volcanos, and tornados) 
  • The driver's vehicle is valuable and they don't have money to pay for repairs (or replacement) if they're in an accident that is not covered.

2. Collision 

Although collision coverage tends to be more expensive than comprehensive, they are equally important. Like comprehensive coverage, though, collision coverage is generally optional. 

Here's how it works: If someone is in a car accident with another vehicle, hits an object (like a mailbox or fence), or otherwise damages their car, collision insurance will pay up to the cash value of the vehicle, minus the deductible. Let's say the car has an actual value of $4,000 and is totaled. If the driver has a deductible of $1,000, collision coverage will pay out $3,000. 

3. Liability

Most states require drivers to carry liability insurance. The minimum liability coverage required varies by state law. There are two types of liability insurance:

Bodily injury

If someone is in an accident and found legally liable for injuries to another person, bodily injury liability insurance pays for medical bills, lost wages, and pain and suffering. 

Property damage

Let's say a driver loses control of their car, hits another vehicle parked on the road, and then crashes into a tree in someone's front yard. Property damage liability insurance will pay to repair the vehicle the driver hit and treat the damaged tree.

If someone is sued, liability insurance will also cover court costs and defense. 

4. Uninsured motorist and underinsured motorist

Some states require uninsured motorist coverage and underinsured motorist coverage while others do not. If someone is hit by a driver who does not carry insurance, uninsured motorist coverage will help pay medical bills and -- depending on the state -- repairs to the car. If a driver causes the accident without adequate insurance, underinsured motorist coverage will fill in the coverage gaps. 

5. Medical payments

Like most of these policy types, medical payment coverage is optional in some states and required in others. This covers the policyholder, family members driving the insured vehicle, and any passengers. It will help pay for things like hospitalization, surgery, and medical tests in the event of a car accident. 

6. Personal injury

Personal injury protection (PIP) is not available in every state. It's similar to medical payments coverage in that it covers medical expenses following an accident. Personal injury protection coverage goes one step further by providing extras like loss of income, house cleaning services, and childcare expenses while the driver is recovering. If someone in the vehicle dies due to an accident, PIP pays funeral costs. 

Other types of auto insurance coverage

Gap coverage

Let's say someone pays $40,000 for a new car and within days it is stolen or totaled. They still owe $40,000, but since new cars depreciate when driven off the lot, that car is now worth $34,000. Even if the driver carries full, comprehensive car insurance, the most the insurer will pay is $34,000. 

Gap insurance helps pay the difference between the car's depreciated value and how much the driver owes -- in this case, $6,000. Gap coverage is optional but a good idea if a motorist doesn't want to be out of pocket if their car is totaled or stolen. Not all insurers offer Gap coverage. People can also look at buying a Gap policy through their lender or car dealership. 

Towing and labor cost

Towing and labor cost coverage protects drivers against fees associated with things like flat tires, dead batteries, or accidentally getting locked out of the car. Some insurers include this service in their premiums, and some require motorists to add it on as an extra. 

Rental reimbursement

This coverage pays a set amount each day for a rental car or pays for public transportation while a vehicle is being repaired after an insurance claim. It doesn't cover things like renting a car for vacation or when a car is undergoing routine maintenance. Rental reimbursement coverage is typically an add-on. 

New car replacement

If a car is totaled, this coverage pays to replace it with a new vehicle of the same make and model. Insurers often add caveats, so make sure to ask the following questions before paying extra for new car replacement coverage: 

  • Do I need to be the original owner of the vehicle? The answer is usually "yes."
  • How old can my original car be? There is almost always a limit. 
  • What happens if the make and model of my original car is no longer manufactured? 
  • What are your exclusions? Travelers, for example, excludes fire, theft, larceny, and flood. 

Classic car insurance

Classic car insurance is designed to cover antique or classic cars. In other words, vehicles that are at least 25-30 years old. Classic car coverage extends to other high-value vehicles like hot rods and muscle cars. While a standard insurance policy provides basic protection, it is unlikely to pay a car's full value if it is damaged. Unlike auto insurance for traditional vehicles, the value of a classic car is agreed upon by the owner and insurance. Whereas a conventional vehicle depreciates over time, classic cars frequently appreciate, a fact that should be reflected in coverage. Check with your insurer to learn how to qualify for classic car insurance. For example, many include limitations on how many miles a car can be driven each year and proof that it is properly stored. 

Ridesharing

If someone plans to drive for a ridesharing service like Lyft or Uber, they need to let their insurer know that they're being paid to drive. Some insurers don't allow it, while others provide extra ridesharing coverage. Also, some states require people to purchase a commercial policy if they work for a ridesharing service, so it pays to find out.

According to Progressive, even if a rideshare service provides some level of coverage, it usually does not provide comprehensive, collision, or additional protection while people are waiting for a ride request. For example, if someone was in an accident as they waited for a request, it would not be covered by the rideshare policy. What rideshare insurance does do is extend coverage on a personal auto policy to cover when a driver is between customers. 

What is the best type of car insurance?

The best type of car insurance depends on a person's circumstances. If they have a classic car, they need coverage that protects it. If someone doesn't have the money to pay for extensive repairs or to replace their vehicle, they may want to shop around for the most inexpensive car insurance they can find. If a person is driving an old beater and doesn't mind if it's banged up or worried about what will happen if it's totaled, liability insurance may be all they need. 

How to choose the right type of car insurance coverage

Choosing the right type of car insurance coverage is made easier by taking these 5 steps:

1. Decide how much coverage you need

Do you want total replacement cost, or are you okay with carrying your state's minimum required coverage? 

2. Determine how much you can afford 

This will depend on your individual situation and your budget. Think about how much you drive, how many people drive your car, and what kind of vehicle you have. 

3. Figure out which policy type is the best fit for your vehicle

For example, if a driver has a new car, they probably want a policy that lets them add gap coverage. 

4. Shop around

The best policies offer the most complete coverage at the lowest rate. It may take a little time, but shopping around can save people hundreds of dollars a year and provide them with the coverage they need. 

5. Ask questions

Ask the auto insurance policy questions that matter to you. That way, when you get a car insurance quote, you can compare each car insurance policy against the others.

Thank goodness for auto insurance. It can get people back on the road when their cars are inoperable, pay medical expenses in the event of an accident, and give drivers confidence when they're on the road with thousands of other drivers with places to go.

Motley Fool Money's best car insurance companies

Check out our hand-picked list of the best car insurance companies. Our top picks are packed with valuable perks, such as low rates, bundled discounts, and best-in-class service.

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FAQs

  • Each state has a specific set of requirements, including the type of coverages available and minimum standards.

  • In the majority of U.S. states you're breaking the law. You also put yourself at financial (and potentially physical) risk.

  • Liability insurance tends to be the least expensive, covering only damages to other people and property caused by the policyholder.

  • The most basic, and the minimum insurance required by most states, is liability.

  • It depends on what kind of car a driver is protecting and how much money they have to make repairs without insurance. For example, if someone is driving an old, beat-up car and they aren't worried about repairs or replacement, liability may be sufficient.