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Car insurance is a confusing but necessary part of owning a car. But you'll want to make sure you aren't wasting money by being over insured, or leaving yourself open to lawsuits by being underinsured.

We’ve written about the importance of bodily injury liability coverage, arguably the most important part of your auto insurance coverage. But there’s a ridiculous amount of auto insurance coverage types.

What do you need to load up on? And which can you skip?

Bodily injury liability

Every single state requires bodily injury liability coverage. 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 seriously hurt or kill somebody else in an accident. 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 driver may sue you for could 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.

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 their car needs body work, their insurance company will recover the damages from your insurance coverage (if you caused the accident).

Many states require that drivers carry this coverage, but again, 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!

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.

Uninsured and underinsured driver coverage

Unisured and underinsured driver coverage protects you when you’re 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. There are a lot of cheap insurance options for drivers, including Metromile, which charges based on miles driven. For a full list of low-cost companies operating in your area, check out this tool:

Physical damage coverage

There are two types of physical damage auto insurance: Collision and comprehensive insurance.

Collision insurance covers any damage to your vehicle only when you’re 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).

You only need physical damage coverage if you lease or finance your vehicle, in which case your auto lender will require you to carry this coverage to protect their asset until it’s paid off. Carrying comprehensive coverage is smart during the first few years of a vehicle’s life when it’s still a valuable asset andholds 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 get from insurance should you get 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.

Summary

States require auto insurance for a reason—it protects you and others in the event of an accident.

What you need depends on your driving record, the value of your car, and what you can afford.

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About the author

David Weliver
Total Articles: 353
David Weliver is the founder of Money Under 30. He's a cited authority on personal finance and the unique money issues he faced during his first two decades as an adult. He lives in Maine with his wife and two children.
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