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Auto Insurance Coverage Types: Which Do You Need?


Earlier this week I wrote about the importance of bodily injury liability coverage, arguably the most important part of your auto insurance coverage. But what about all the other auto insurance coverage types? What do you need to load up on? And which can you skip?

Auto Insurance Coverage Type #1: Bodily Injury Liability

As mentioned in my earlier article, bodily injury liability coverage is required by law in every single state. It protects your assets in the event you cause an accident and injure or kill another person.

Although this type of insurance coverage is required by law everywhere, the legal minimum coverage may not be enough if you serious hurt or kill somebody else in an accident. For example, some states only require your bodily injury liability insurance to cover you for $10,000 in damages per person and $20,000 per accident. Even minor medical expenses that another injured driver may sue you for could easily exceed this small limit.

If you own your home, have money in the bank or investments, own a business, or have any other assets, you want to get enough bodily injury liability insurance to protect them so an injured drive can’t sue you and take your assets.

Auto Insurance Coverage Type #2: Property Damage Liability

This is the insurance coverage that covers you if you cause an accident and damage another vehicle or physical property. If you hit somebody and they need body work, their insurance company will recover the damages from your insurance coverage (if you caused the accident).

Many states require drivers carry this coverage, but the minimum limits may not be enough. Some states require just $5,000 in property damage liability coverage. If you only carry $5,000 of this coverage and cause an accident that totals another driver’s $70,000 Mercedes, however, you could be on the hook for $65,000!

Auto Insurance Coverage Type #3: Medical Payments

This insurance covers the cost of any medical treatments required by you or passengers in your vehicle if you cause an accident. It does not cover other financial damages that result from an accident that you cause, such as lost wages.

Auto Insurance Coverage Type #4: Uninsured and Underinsured Driver Coverage

This coverage protects you when you are hit by a driver without insurance or without sufficient insurance. In most states, uninsured/underinsured driver coverage only covers bodily injury losses, but in a few states it will cover property damage losses as well.

Auto Insurance Coverage Type #5: Physical Damage Coverage

Physical damage auto insurance is divided into two categories: Collision and comprehensive insurance. Collision insurance covers any damage to your vehicle only when you are involved in an accident (including, for example, if you back into a tree). Comprehensive insurance, on the other hand, covers all kinds of damage to your vehicle (including weather damage, windshield damage, theft, fire, or vandalism).

Physical damage coverage is optional unless you lease or finance your vehicle, in which case your auto lender (lien holder) will require you carry this coverage to protect their asset until it is paid off. Carrying comprehensive coverage is smart during the first few years of a vehicle’s life when it is still a valuable asset (holds substantial resale value).

If your car is older, however, consider canceling comprehensive coverage. The less valuable your car on the resale market, the less you can expect to recover from insurance should the car be damaged in an accident. If you drive a really old car, for example, and it sustains even minor damage in an accident, the insurance company may decide the cost of repairing the car is higher than its resale value and decide to give you it’s resale value (maybe $1,500) instead. If your carry a $500 deductible (the amount you agree to pay out-of-pocket in any insurance claim), comprehensive coverage would only pay you $1,000.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.