Types of Car Insurance: Explained In Layman’s Terms

Car insurance covers a variety of things. Some cover property damage, while others cover injury and theft. The sort of automobile you drive, your location, and any other insurance policies you have will all be factors in determining what type of insurance you need.

When you buy or lease a car, it’s critical to protect your investment in the vehicle. Purchasing auto insurance can provide peace of mind if you are involved in an accident or your car is stolen, vandalized, or damaged by a natural catastrophe. Auto insurance companies collect annual payments from policyholders in place of them paying out-of-pocket for auto accidents. The insurance company then pays all or most of the costs associated with an auto accident or other vehicle damage.

Insurance for your car is, in essence, a contract between you and an insurance provider, in which you agree to pay premiums in exchange for protection against financial losses resulting from an accident or other damage to the vehicle you drive. Auto insurance can provide coverage for the following things:

  1. Damages to cars, including your own vehicle and the vehicle of another driver
  2. Damage to property or bodily harm as a result of an accident.
  3. Medical bills and/or burial expenditures incurred as a result of an accident-related injury

The specifics of what is covered will vary according to your state’s minimum coverage requirements as well as any additional coverage options you want to include. Except for New Hampshire, every state mandates drivers to carry a minimum amount of bodily injury liability coverage as well as a minimum amount of property damage liability coverage.

How does car insurance work?

In exchange for your payment of a premium, the insurance company undertakes to compensate you for your losses in accordance with the terms of your policy. Policies are priced on an individual basis, allowing you to tailor the level of coverage to your specific requirements and financial constraints. Policy terms are typically six or twelve months in length, with the option to renew. When it’s time to renew a policy and pay another premium, an insurer will contact the consumer through email or letter.

No matter whether they require car owners to carry a minimum level of auto insurance, nearly every state requires them to have bodily injury liability insurance, which pays for costs related to injuries or death caused by you or another driver while operating a vehicle. Additionally, they may need property damage liability coverage, which reimburses third parties for damage that you or another driver using your vehicle causes to another vehicle or other property.

In a few areas, car owners must carry medical payments or personal injury protection (PIP), which reimburses medical expenditures incurred by you or your passengers if they are injured in an accident. It will also cover any lost wages as well as any other expenditures that may arise.

An uninsured motorist policy reimburses you in the event that you are involved in an accident caused by a driver who does not have auto insurance. In the event of an accident with a driver who has some insurance but not enough to cover the whole cost of a claim, underinsured motorist coverage is designed to protect you.

Types of car insurance

What is the significance of automobile insurance? You would be forced to pay for pricey claims out of your own wallet if you did not have it. This could put your personal assets at risk of being taken advantage of.

Begin by studying as many vehicle insurance companies as you possibly can if you’re looking for the best car insurance company. Comparing auto insurance rates and the perks that each insurer provides will be easier with this method.

Personal auto insurance solely covers driving for one’s own pleasure. The insurance will not cover you if you use your automobile for business activities, such as delivering deliveries. If you use your automobile to work for a ride-sharing service such as Uber or Lyft, your insurance will not provide coverage for you. A number of motor insurers are now offering extra insurance policies (for an additional fee) that give additional coverage for vehicle owners who operate ride-sharing businesses.

You and other family members covered by an auto insurance policy will be protected whether you are driving your own vehicle or someone else’s vehicle (with their permission). Your policy also covers someone who is not listed on your policy but who is driving your automobile with your permission under your supervision.

It is critical to get automobile insurance. It ensures that you are protected in the event of an accident or if something happens to your vehicle while driving. Automobile insurance is available in a variety of forms, making it difficult to choose which type of auto insurance you require.

Each sort of automobile insurance provides coverage for a particular aspect of the vehicle. Some policies cover property damage, while others cover injuries, and a few policies even cover theft. When deciding on the sort of insurance you should get, factors such as the car you drive, the area you reside in, and any other types of insurance plans you have previously purchased will be taken into consideration.

This article will assist you in understanding the various possibilities available to you as well as locating the most inexpensive prices on the automobile insurance coverages that are most appropriate for your needs.

Types of car insurance cover

Typically, a basic auto insurance policy will include six different types of coverage, each of which will have its own premium.

1.   Liability coverage

Almost all states require some form of liability insurance, but because standards differ from state to state, it is crucial to understand what your state requires. According to 21st Century Insurance, liability insurance protects you from causing harm or property damage to other people or their property when you are deemed to be at blame for the damages.

Generally speaking, liability insurance is divided into two categories:

  • Physical injury: This coverage covers the medical expenses of people who are hurt as a result of your negligence in a traffic accident. This form of protection will provide coverage for you and anyone else who is identified as a driver on your insurance policy.
  • Property damage: In the event of an accident, this sort of liability coverage pays to repair or replace vehicles or property such as fences and mailboxes.

Your liability limits are the maximum amount of money that your insurance company will payout in the event of an injury or damage to another person. The remaining charges must be paid out of your own pocket once you have reached these restrictions.

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2.   Collision coverage

Collision insurance assists you in paying for repairs or car replacement if you are involved in a traffic accident with another vehicle or if your vehicle collides with a stationary object such as a tree or a curb. With this coverage, insurance providers pay up to the value of your car at the time of the accident, less the amount of your deductible.

Having collision insurance can help you get back to where you were financially before the damage occurred if you own a newer or higher-value vehicle in general. It may not be worthwhile to purchase collision coverage if your automobile is older and losing value quickly or if the value of your car is near to your deductible.

It is voluntary to obtain collision coverage in most states. It is included in full coverage motor insurance policies; some leaseholders or lenders may force you to purchase collision coverage.

3.   Comprehensive coverage

Fire, falling objects, missiles, explosions, earthquakes, windstorms, hail, floods, vandalism, and riots are all examples of events that can cause damage to a vehicle other than a collision with another vehicle or object. This coverage also covers damage caused by contact with animals such as birds or deer. When purchasing comprehensive insurance, policyholders can typically choose between a $100 and $300 deductible, though policyholders can also choose a greater deductible in order to lower their rate.

If the policyholder’s windshield is cracked or damaged, comprehensive insurance may be able to reimburse him or her. Some insurance carriers provide separate glass coverage, which may or may not include a deductible. Although collision and comprehensive coverage are not required by law in most states, lenders may insist that borrowers maintain them until their car loan is paid in full.

Comprehensive coverage typically includes a deductible, which means you must pay a portion of the costs out of cash before your insurance will begin to reimburse you.

When deciding whether or not comprehensive coverage is right for you, consider the following factors:

  • Vehicle year of manufacture Vehicle miles
  • The car’s real monetary worth at the time of purchase
  • The cost of insurance premiums for your age group or geographic location
  • What the likelihood is that your vehicle will be stolen or vandalized

If you reside in a location where natural catastrophes or harsh weather occur frequently, your capacity to pay for repairs or car replacement out-of-pocket is an important consideration.

Each of these factors will assist you in determining whether or not comprehensive coverage is appropriate. If you are able to afford the fees out of your own cash, you may not require comprehensive insurance. If your vehicle has a large monetary worth, your monthly payments will be more expensive. In the case of a locked garage, for example, the chances of your vehicle being stolen or vandalized are quite minimal, and you may never need to use your insurance policy.

4.   Uninsured/underinsured motorist coverage

In the event of an accident with a driver who does not have insurance, uninsured motorist coverage covers your medical expenses as well as repairs to your vehicle. When the at-fault driver’s auto insurance limits are insufficient to cover the full cost of your repairs or medical bills, underinsured motorist coverage kicks in to help. Some states’ minimum insurance requirements include coverage for uninsured and underinsured motorists.

Uninsured motorist coverage is only available if you are not at fault in the accident. Some states require that someone is considered legally at fault for an accident in order for this form of coverage to pay out; however other states are no-fault states, meaning that no drivers are regarded legally at fault for an accident in those places. Check with your state’s insurance regulations to see if uninsured or underinsured motorist coverage is available in your state.

5.   Medical payments coverage

Surgery, hospitalization, and x-rays are all covered by medical payments insurance, often known as MedPay, following a car accident no matter who was at fault. MedPay is available in several forms.

The medical payment system is frequently likened to personal injury protection; however, the most significant difference between the two forms of coverage is that MedPay does not compensate for home care or lost income.

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6.   Personal injury protection (PIP)

The Personal Injury Protection (PIP) program is comparable to MedPay; however, there are several distinctions between the two. Unlike MedPay, which solely covers medical expenditures, PIP covers medical care as well as other injury-related losses, such as lost pay from time spent out of the office due to your injury. Because PIP coverage is required in no-fault states, PIP is frequently referred to as no-fault insurance.

Additional types of car insurance you may need

Full glass coverage

When you’re stranded on the side of the road, the last thing you want to do is start worrying about how expensive the breakdown might be. In this case, inexpensive optional coverage for your auto insurance policy can be beneficial. For those who do not have comprehensive car insurance, towing and labor cost coverage is optional and can be added to your policy. This coverage typically protects you against some of the costs and inconveniences of common roadside breakdowns, such as dead batteries, flat tires, and even an embarrassing lockout. The specific services provided by this form of insurance coverage will vary from company to company; however, they may include the following items:

  • Towing
  • Changing tires is a common occurrence.
  • Starts things off in a hurry
  • Aid with a lockout
  • Delivery of gas or oil

Generally speaking, the “labor cost” portion of this coverage refers to any labor charges that you may incur at the scene of the breakdown in order to get your car back up and running again. The coverage, on the other hand, does not normally cover the cost of any necessary replacement parts (so it may cover the fee to change your tire, for instance, but not the cost of the actual new tire).

Car towing coverage

Full auto glass insurance will assist you in paying for repairs to your vehicle’s headlights, mirrors, and windows with no deductible. Consider the following scenario: a robber gains entry into your home by smashing your car window. The cost of repairing it has been estimated at $600. If you only have comprehensive auto insurance, you’ll be responsible for paying the deductible before your coverage will cover the cost of windshield repair.

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You will incur no out-of-pocket expenses if you have full glass coverage because the cost of fixing the window will be paid in full. Keep in mind that the availability of this sort of insurance varies from state to state and is not always available.

Personal umbrella insurance

Personal umbrella insurance covers more than just accidents and property loss. This coverage might be beneficial if a covered loss exceeds the liability coverage limitations of your homeowner’s or auto insurance policy.

Example: If you are sued, and the damages are greater than your primary insurance policy’s liability limit, umbrella insurance can assist you in covering the extra costs. It is not required by law in any state, and it is not mandatory in any state, but you may want to consider adding it to your current policy to provide additional protection.

Gap insurance

Guaranteed car protection, often known as gap insurance, protects you if the amount you owe on a lease or loan exceeds the vehicle’s true cash value, and you have to pay the difference.

The comprehensive and collision coverage on your automobile will only pay for the car’s current worth, which may be less than the amount of time left on your lease or loan. If your car is totaled or stolen, your comprehensive and collision coverage will only pay for the car’s current value.

Gap insurance compensates you for the outstanding sum on your loan that is not covered by your comprehensive or collision insurance.

Rental car reimbursement coverage

In the event that your insured vehicle is being repaired or replaced, rental reimbursement will cover the cost of a rental car.

Generally, these policies include restrictions on how much the insurance company will pay out in a given day or claim, but these limits are usually sufficient to cover you completely until your automobile is repaired.

Rental car insurance

It is mandatory to obtain liability coverage while renting an automobile for recreational purposes. Collision damage waivers and loss damage waivers are two types of rental automobile insurance that are commonly offered by car rental businesses. If you sign these documents, you will not be held financially liable if there is damage to the car or if someone breaks into it.

However, if you are involved in a car accident, your existing auto insurance policy may also cover damage to your rental car. If you plan to rent a car, check with your insurance company to be sure you’re protected before you leave.

Emergency roadside assistance

An emergency roadside assistance provider can help you unlock your car, jump start a dead battery, change a flat tire, or refuel your vehicle if you have run out of gas. Emergency roadside assistance will tow your vehicle up to a predetermined distance, either to a repair shop or to your home, in the event that it is in need of repair.

Classic car insurance

Classic automobile insurance provides coverage for a specific type of vehicle. These automobiles must be classified as vintage, classic, or antique in order to be covered by these insurance policies. Each manufacturer has its own notion of what constitutes a classic automobile.

After a traffic accident, insurance provides you with peace of mind and the certainty that your finances will not be significantly disrupted. If you, your car, or another person or their property is destroyed, insurance can help you recover financially. To find out what insurance is appropriate for you, look online or speak with an insurance agent situated in your area to receive the best rates.

Ride-sharing coverage

It’s possible that you’re already aware that if you drive for a ridesharing firm such as Uber or Lyft, your personal car insurance policy will not cover the “business use” of your vehicle. In other words, if you are involved in a car accident while on the job, you may be required to pay out of pocket for charges such as vehicle repairs or medical fees for an injured party.

The majority of ride-sharing companies are required by state law to provide insurance for their employees. For those who use their vehicle for both personal and professional needs, you may want to consider purchasing extra protection for your vehicle to help keep it safe. Listed below are some considerations to bear in mind when considering ridesharing insurance — sometimes known as ride-hailing insurance — and the types of eventualities that it may be able to help cover.

New car replacement coverage

Owning a new car entails doing everything in your power to keep it safe. It is possible, though, that it will be totaled in an accident, in which case optional new car replacement coverage may be beneficial. Unless your car is two model years old or newer, we will not only offer you a cheque for the depreciated worth of your vehicle; we will also replace the vehicle entirely.

Do I need car insurance?

Car insurance is required by law in the majority of states. If you fail to do so, you may not only be liable for any claim costs, but you may also be subject to fines, penalties, and even criminal prosecution.

The minimum amount of bodily injury liability and property damage liability coverage required by your state’s vehicle insurance rules will be specified in those statutes. It is entirely up to you whether or not to increase coverage. Keep in mind that if you have additional coverage, you will be able to avoid paying out of cash for repairs or accidents. For example, if you include collision and comprehensive coverage with your auto insurance, this might be considered full coverage auto insurance.

How much car insurance do I need?

There are several factors to consider when determining which types of motor insurance to purchase and how much auto insurance coverage to purchase:

  • The bare minimum standards in your state
  • What you can afford to spend for insurance is a major consideration.
  • Your own particular tolerance for risk.

At the absolute least, you’ll require minimal coverage – that part is a given. But what about additional coverage? With no minimum coverage insurance in place, you could find yourself spending a few months in prison.

There are specific situations in which you will need to increase your insurance coverage. If you work as a rideshare driver for companies such as Uber or Lyft, you must have ridesharing insurance. As an example, your lender may mandate that you obtain gap insurance if you are financing or leasing your automobile.

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Other factors to consider are how much money you can afford to spend on insurance and how risk-tolerant you are on your own behalf. In general, we recommend that you get optional coverage such as comprehensive and collision insurance to provide you with additional financial security.

You can choose a higher deductible for your collision and comprehensive coverage in order to save money on your insurance premiums. Deductibles might be as high as $2,500 in some cases. Despite the fact that this is a significant sum of money to pay in an at-fault collision, it is still less expensive than replacing someone’s damaged BMW.

Final word

Car owners should be prudent enough to select the most appropriate auto insurance coverage alternatives in order to minimize risk while maximizing advantages. Despite the fact that mandatory liability insurance is the most affordable choice, it does not protect the policyholder’s interests. As a result, the brand and model of the car, the frequency of use, the location, and other aspects should be considered when selecting an insurance policy. By comparing and researching different types of coverage, you may choose the most affordable auto insurance policy for your needs.

Tony Bennett

Tony Bennett

Tony Benett makes his living in the insurance industry by teaching and consulting. He is also recognized by the legal profession as an expert on insurance coverages. His insurance experience includes having worked at the company level, owned an independent general agency and having worked for an insurance association. He has received various certificates over the past few years and helps his clients and readers by giving them a realistic outlook on what they can expect to achieve within their set targets. At Insurance Noon, he is known for his in-depth analysis and attention to details with accuracy. He has been published as one of the most referred agents by his peers in the insurance community. Tony loves the outdoors and most sport events. His passion other than providing excellent advice is playing golf.

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