Car Insurance Coverage Explained: A Complete Guide

Auto insurance protects drivers from the financial burden that car accidents and unexpected vehicle damage can bring. However, understanding auto insurance policies can be challenging. 

What types of coverages are available? Should you purchase additional coverages? What must be included in auto insurance policies in your state?

Below are the five types of car insurance coverage explained to help you find the right policy for your needs and budget.

Understanding Car Insurance Coverage

If you’re shopping for car insurance, there are mandatory coverage requirements and optional coverages you can add to round out your policy. By researching the types of car insurance coverage explained here, you can make the most informed decisions when comparing carriers.

Mandatory Car Insurance Coverage Types

Almost all states have car insurance coverage requirements that apply to all drivers. These are the types of coverage that may be mandatory to legally operate a vehicle in your state.

Liability Coverage

Liability coverage protects you from financial responsibility when a crash is your fault. For example, running a red light and causing an accident can lead to substantial medical bills and expensive car repairs for the other party. Liability coverage can cover these expenses, so you don’t have to pay out of pocket or face legal issues.

However, there are liability limits that cap the amount your insurance will cover. Most commonly, states require the following minimums on liability coverage:

• $25,000: Bodily injury per person
• $50,000: Bodily injury per accident
• $25,000: Property damage per accident

Personal Injury Protection

If you’re in a car crash and live in a no-fault state, you must file an insurance claim with your own provider, regardless of who was at fault. Personal injury protection (PIP), also known as no-fault insurance, covers medical expenses and lost wages for you and your vehicle's passengers up to your policy limits.

Here’s a scenario in which you would use your PIP coverage. A driver looks at their cell phone when they drift into your lane and cause a collision. You suffer a broken arm and can't work for several weeks. Even though the other driver caused the crash, you file a claim with your insurance company to cover your medical bills and lost income.

Uninsured/Underinsured Motorist Coverage

Many states also require drivers to carry uninsured/underinsured motorist coverage. This protects you if you’re involved in an accident with a driver who doesn't have insurance or whose insurance is not enough to cover your damages.

It can be frustrating when someone else’s carelessness causes an accident and financial issues for you. For instance, you’d likely have to pay for your car repair expenses and medical bills if the driver responsible for the accident does not have insurance. However, uninsured/underinsured motorist coverage would protect you from paying out of pocket.

Optional Car Insurance Coverage Types

There are other types of optional coverage you can add to your car insurance policy. These additional coverages offer more protection in case of an accident.

Collision Coverage

While collision insurance is optional, it’s a popular type of coverage because it pays for damage to your vehicle after an accident — no matter who is at fault. This coverage is particularly important if you have a newer or more valuable car, like an electric vehicle. In fact, lenders will typically require collision coverage when you finance your car.

Collision coverage protects you from potentially high expenses after a crash. In some cases, the other driver may not have active insurance, or their insurance is insufficient to cover your damages. Also, you may have caused the crash, or no other driver was involved in the accident. If that happens, collision insurance can pay for repairs up to your coverage limit.

Comprehensive Coverage

Comprehensive coverage, which may be required if you lease or finance your car, pays for damage to your vehicle that was not caused by a crash. For example, theft, vandalism, natural disasters, or a collision with an animal can lead to expensive repairs. If you carry comprehensive coverages on your car insurance policy, you can file a claim to cover the cost of these repairs. 

Other Optional Coverages

Many drivers also benefit from other optional insurance coverage types, including:

• Gap insurance: If your car is totaled in an accident but the vehicle is leased or not yet paid off, gap insurance covers the difference between what you owe and the car's actual cash value.
• Medical payments coverage (MedPay): MedPay insurance is optional in most states. Similar to PIP insurance, it reimburses for medical expenses caused by a car accident. However, MedPay benefits are typically more limited.
• Rental reimbursement: Rental reimbursement will cover the cost of a rental car if your vehicle is undergoing repairs due to an accident or other covered event.

Deductibles: What You Need To Know

An insurance deductible refers to the out-of-pocket payments a policyholder must make before their insurance pays for covered expenses. For example, if you’re involved in an accident and have a $500 deductible, you must pay $500 before your insurance covers the rest of the expenses.

Understanding Policy Limits

A coverage or policy limit is the maximum amount an insurance company will pay for a covered claim. If your insurance claim amount exceeds your coverage limits, you will need to pay the remaining costs out of pocket.

When shopping for an auto insurance policy, remember that you can carry more than the minimum car insurance coverage. Speak with an insurance agent about purchasing more coverage protection and pricing.

Factors That Influence Insurance Premiums

The amount you pay for car insurance will depend on several factors, including your:

• Driving record
• Location
• Credit history
• Age and gender
• Deductible amount
• Car’s make and model
• Chosen coverage
• State’s insurance requirements

Key Policy Elements and Terminology

Many people feel overwhelmed when they hear terms like auto policy, insurance premium, and insurance claim. As we explain car insurance coverage, knowing what these terms mean and how they affect you is essential. 

Here’s a quick breakdown:

• Insurance policy: Your insurance policy refers to the contract between you and an insurance company. As your insurance provider, the company agrees to provide financial protection in the form of different coverages when there is damage to your vehicle.
• Insurance premium: An auto insurance premium is the amount the policyholder pays for their coverage. Depending on your insurance company, you may pay your premium monthly, quarterly, biannually, or annually.
• Insurance claim: Policyholders can file an insurance claim to request that their provider pay for covered expenses after an accident. This generally involves providing details about the crash, including contact information from other people in the accident.

The Importance of Regularly Reviewing Your Coverage

After reviewing the car insurance coverages explained in this guide, it’s time to take another look at your policy. Over time, your needs may have changed, and making necessary adjustments will ensure you’re fully protected. Likewise, you may have optional coverages you no longer need, and updating your policy can help you save.

Tips for Comparing Car Insurance Policies

Insurance prices change daily and can vary drastically by zip code and driver profile, so the best way to get the insurance coverage you need within your budget is to compare custom options. Using our free comparison tool, it only takes a few minutes to compare and shop for the right insurance at the right price.