7 Types of Car Insurance: Which Ones Do You Really Need?

by Thursday Bram · 18 comments

The cost of even a small repair makes car insurance nice to have. When we start adding in the medical expenses that can go with a car accident, insurance becomes downright necessary. In many states, insurance is even a legal requirement before you can drive your car out on the road. But a wide variety of options are available when it comes to insurance — there are actually seven different types of car insurance you can choose from in most cases — and it can be difficult to decide just what type of auto insurance is the best choice for you, your vehicle and your budget. Here is a list of the seven types and what you need to know about each one.

1. Liability Insurance

When your state requires that you carry some sort of insurance for your car, they’re usually looking for liability insurance. In the event that you are in a car accident and the police decide it is your fault, liability insurance covers the cost of repairing any property damaged in the crash (such as cars or buildings), as well as the medical bills from resulting injuries. Most states have a minimum requirement for liability insurance coverage that you absolutely must have.

However, it usually makes sense to go beyond that minimum requirement if you can afford the payment. That’s because you are personally responsible for any claims that exceed your coverage’s upper limit. In the event that you are in an accident, you don’t want to run the risk of having to pay a significant amount of money out of your own pocket. How much liability insurance you need depends on whether you have a lot of assets to protect, as it is more important to have higher levels of coverage just in case of a catastrophe.

2. Collision Insurance

The biggest problem with carrying only liability insurance is that if there is an accident, you may wind up without the money to repair your own vehicle. A collision insurance policy makes it so that someone else — your insurer — will pay for the repairs to your car. If your car is totaled in an accident, a collision insurance policy will pay out the value of your car. While the payout won’t cover for a brand new vehicle, the sum will equal approximately what the car was worth before the accident.

Collision insurance isn’t a must-have, as far as insurance goes. If your car is older, it may not be worth paying for insurance, especially if you can work on saving up enough to replace the car if necessary. If you have a good-sized emergency fund, you may be safe without collision insurance. If you’ve chosen a more expensive car or your car is relatively new, however, collision insurance can help you sleep much better at night.

3. Comprehensive Insurance

Liability and collision insurance policies exclusively cover car accidents. If something else happens to your car — weather damage, theft, an animal collision — you won’t be able to get your insurance company to address the problem. With a comprehensive insurance policy, however, your insurer will handle just about any situation that comes up.

A comprehensive insurance policy is one of those things that are nice to have. However, coverage can be pricey and may not be worthwhile if your car would be relatively easy for you to replace, if you had to. Note though that you can bring down the price of this policy if your vehicle has an anti-theft and tracking devices installed.

4. Uninsured Motorist Protection

Just because the law requires everyone to have insurance doesn’t actually mean that’s the way things work out. Even if a driver has a liability insurance policy, most states have relatively low minimums that may not cover all of the expenses that can go along with an accident. One of the worst things that can happen is that you get stuck with the bills in an accident that wasn’t even your fault.

The decision to get a policy that covers damage by an uninsured motorist isn’t as clear cut as other policies. In theory, even if a driver doesn’t have enough insurance to cover damages during an accident, he will still have an obligation to cover the costs out of pocket. It’s only when the person at fault doesn’t have any money that there can be problems.

5. Medical / Personal-Injury Protection

The costs associated with treating injuries after a car accident can be astronomical. In order to cover those costs, medical and personal-injury protection is available. No matter who is at fault, such protection will cover your medical bills along with those of your passengers.

If you have a good health insurance plan, however, it’s far less likely that medical and personal-injury protection will be useful to you. And considering how much more a general health insurance policy covers, it should be your first choice.

6. No-Fault Insurance

So far, no-fault insurance is available in twelve states. This option covers injuries and property damage, no matter who is ultimately responsible for a given accident. The decision to choose no-fault insurance really depends on what other insurance options are available to you and at what price. Some no-fault policies can be expensive, making it more cost-effective to choose other options, especially if your car is inexpensive to replace.

7. Gap Insurance

If you are still making car payments, gap insurance may be a good choice. It’s meant for drivers who still owe money on their cars and need to pay off the vehicle if it is totaled in an accident. It’s generally a good choice if you owe more on your car than you could easily pay off on short notice.

Gap insurance is especially worthwhile if you owe more on the car than you could get for it if you sold it today, since many insurance policies will only cover the value of the car, rather than the cost to replace it. Some lenders may require you to have gap insurance or something similar until you pay off the vehicle, so you may already have it whether you know it or not.

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{ 18 comments… read them below or add one }

Lakita (PFJourney) March 31, 2010 at 5:16 am

Great list with the types of insurance explained. I especially like the GAP insurance I know several people that were saved by having that….and a few that wish they had it.

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marci357 March 31, 2010 at 7:42 am

And the one insurance I personally would not be without….Emergency Roadside assistance… For $10/year I feel it’s well worth it. And yes I’ve used it more than once.

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MoneyNing March 31, 2010 at 8:56 am

One other related tip on insurance is that you can mix and match between your cars. My wife has a newer car, and we have comprehensive coverage while I drive an older car so we are fine with no coverage since we can pay for our own replacement. This fine grain approach saves even more money, and makes more sense for us.

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RJ Weiss March 31, 2010 at 8:58 am

Just an FYI and I’m not sure if this is true in all states, but is is true in Illinois. Uninsured motorist coverage only protects you if the other driver had no insurance. If the other driver had insurance, but not adequate coverage (i.e. their liability limits were really low), then you need to have under insured motorists. It’s known as UM/UIM on your policy.

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Cd Phi March 31, 2010 at 12:39 pm

Informative post. Car insurance is really expensive if you don’t know which insurance you should get. There are many things that can reduce your car insurance premiums as well such as things like good student discount and good driver discount. You just have to ask to make sure you can get the best possible premium.

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basicmoneytips.com April 1, 2010 at 4:41 am

Liability insurance is of course the minimum you can have. However, one thing I would mention about that is the medical coverage limitiations. There is usually a state minimum that is set, such as $25K. That means should you cause an accident, the insurance is only going to pay $25k worth of someone’s medical bills. Most people who just carry liability just take the state minimum allowed amounts and go on about their day.

With health care costs, $25K is not a lot these days. Also, there is always the chance the accident can be bad.

For usually just a couple dollars a month you can up that level to a figure such as $100K. Personally I think it is well worth it.

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jerry April 1, 2010 at 5:01 pm

I know that car insurance has saved my bacon more than once, although I did not have uninsured motorist insurance when I was hit by a guy who decided to take off after crushing me into a row of parked cars, and it was really frustrating. I didn’t even know that was an option (the uninsured coverage part, not the hit and run part.), and it leads me to believe that it’s important to know all of the options.
Jerry

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mcshaun April 1, 2010 at 5:51 pm

Some will offer packages that may save you money, while others will offer packages that will have you paying for types of car insurance that you may not need. Besides premium rates, see how much coverage you are getting and find out about limits, restrictions and any additional fees

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Double My Net Worth April 3, 2010 at 6:04 am

Having been in 9 car accidents myself, I certainly have seen the benefits of car insurance as well as the downsides. For example, I just had paid off a 3 year old car bought brand new a week before it was totaled in a no-fault state.

As a result, I lost more than 50% of what I paid for the car. I know the value of the car depreciate but it does not justify the high premiums I paid for in that state. MA is even worse when it comes to insuring your car. All the major carriers, State Farm, Progressive, etc… won’t even touch MA.

However, yes, I do agree with you, the older the car, the less it is worth making collision insurance optional. Do keep in mind that your deductible also reflects the cost of premiums and repairs. Even if you have an accident (where a rock falls off the dump truck on the Interstate and smashes your headlight before proceeding to ding the hood of your car) and it cost less than your deductible, always inquire whether the other party’s insurer will cover the cost before shelling out your own money because your own insurance carrier won’t pay until the costs exceed your deductible by a penny.

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CarInsuranceQuote.net April 3, 2010 at 8:33 pm

It’s important to discuss specific policy coverages with your agent and/or company. If you have an older vehicle for example and you’ve been involved in multiple accidents, you might consider carrying full coverage. If the car is old, the premiums will be cheap, but it will be even cheaper to pay the deductible than to donate the car after an accident and have to find a new one.

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Buy Groceries Online April 4, 2010 at 1:09 pm

Don’t forget that you can act as your own ‘first line’ of car insurance, by having a safety net savings account.

Instead of having a low deductible with higher premiums, you can opt for a higher deductible to get lower premiums.

If you don’t make a claim, then you saved a lot of money. If you have a small accident, you can choose to simply pay cash, so it’s stays off of your insurance claim record to prevent higher premiums in the future.

And if you have to make a claim and pay the higher deductible, then most likely you will have still saved money that year.

In 27 years of driving, I’ve never made a claim, so this strategy has saved me a lot of money.

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melissa November 5, 2010 at 7:30 am

Don’t forget that when shopping for a new car, most lien holders will require you to carry comprehensive and collision coverage with a deductible not greater than $500, so check with your insurance agent for a quote before your purchase a vehicle that will be financed to make sure that you can afford the premium.

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Patricia V Gomez July 27, 2011 at 4:42 pm

What is the difference on Deductible Other Than Collision and Deductible Collision? And which is best to pick? We own a 2001 Ford Exployer and is paid for and a 2009 Chevrolet, and we still owe $9800.00. Which is best to carry? One or the other or both?

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Matthew Pavlica October 9, 2011 at 12:22 am

Great article, here are several tips from me on how to get cheaper car insurance:
- Use insurance comparison sites to find a better rate. That means once you register you’ll receive a lot of offers from many insurance companies.
- Ask for group discounts. Get as many insurances as you need from the same company.
- Stay insured. If you cancel your plan even for several days, some companies may consider you as high risk and you may need to pay more next time.
- Car security devices. Any extra security measures you take to deter thieves from stealing your car will further decrease the risks you pose to the insurance company.
- Good driving records. This will definitely lower your price.

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Rebecca October 23, 2012 at 7:37 pm

Do I have to have credit to obtain car insurance?

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Joshua Squires July 5, 2013 at 7:09 am

I learned my car insurance lesson a while back. I was in an accident with someone who was underinsured. Their lack of adequate coverage left me in the lurch and caused a significant financial setback. I couldn’t sue them either, as the court costs would have exceeded the amount I would have sought from them. In the end, I just ate the extra expense, but now I carry uninsured/underinsured coverage so it doesn’t happen again.

Great article by the way.

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donnachan January 9, 2014 at 8:59 am

I think that a solid liability coverage plan is all you need. you don’t need to waste your money on all that other jazz.. liability coverage is cheap too (i found 29/month coverage from 4autoinsurancequote), and the money u save by not buying the extras can be put into an “accident” fund

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Herman July 10, 2014 at 10:42 am

Very soon this site will be famous among all blog people,
due to it’s nice articles or reviews

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