The Different Types of Auto Insurance Policies You Need to Know About

Have you ever wondered about the different types of auto insurance policies? If so, then you’re not alone.

Many people are unsure of the various types of policies available to them, which leads to confusion when trying to choose an auto insurance policy that works best for their needs.

Read on to learn more about the different types of auto insurance policies and how they can work for you and your budget.

Why do you need auto insurance?

The answer to that question will vary from driver to driver. Some drivers need comprehensive coverage in case their car is stolen or vandalized, while others have been smart enough to purchase replacement-cost coverage.

Replacement-cost coverage does exactly what it sounds like: It pays for repairs and/or replacement costs for your vehicle without subtracting for depreciation—which means you get paid exactly what you’d get at a dealership or auto body shop.

It’s not available in all states, but if it is where you live, make sure you have it on your policy; your premium will be higher because insurers know most people don’t have such an option, so they charge more. Still, chances are good that such policies would pay off over time.

Do you have full coverage or liability only?

When it comes to car insurance, you have a lot of different choices, but it can be overwhelming. The first thing you need to figure out is what kind of coverage is required by your state.

Once you have that down, you can shop for an insurance policy. If you live in a no-fault state and only need liability insurance, you’ll save on premiums.

In other states, getting full coverage will provide more comprehensive benefits in case there’s an accident and injuries are involved.
And if your car is new or has a high value, consider buying collision and comprehensive coverage as well—it may increase your premium slightly but could protect your assets if there’s an accident.

Understanding liability limits and deductibles

When you buy auto insurance, you may be offered a variety of options. If you’re not sure what those mean, don’t worry—we’ll break down each type below.

Your liability limits determine how much money will be available if someone is injured in an accident that involves your car and their injuries are serious enough that they can sue you.

Liability is split into two parts: injury liability and property damage liability.
Your deductible is an amount you agree to pay before your auto insurance coverage kicks in. When you file a claim, you’ll only need to pay that amount out-of-pocket before your insurance carrier pays any additional costs.

The lower your deductible, the higher your monthly premiums will be—and vice versa. Although higher deductibles can save you money, they increase risk because you’ll be responsible for covering more costs yourself.

Bodily injury liability coverage

Bodily injury liability insurance covers a policyholder if they are found responsible for an injury. If you cause an accident that injures another driver and are deemed at fault in that accident, your bodily injury liability coverage will pay for injuries sustained by others.

This is a very important type of coverage to have; without it, you would have a hard time proving financial responsibility if you were sued.
This is also referred to as third-party liability insurance; since it pays others on your behalf if they are injured in an accident caused by you.

Property damage liability coverage

While collision and comprehensive coverage are optional, liability insurance is required in every state but New Hampshire.
If you’re in an accident, property damage liability covers what your car damages when it collides with another vehicle or object. In most states, property damage liability will also cover injury claims from anyone who suffers an injury in your car due to your negligence.

It also covers you if you cause an accident that injures someone on a motorcycle or scooter if you’re not paying attention.
Property damage liability determines how much will be available if someone’s property is damaged in an accident.

If a driver hits a parked car, their property damage liability coverage would pay for fixing or replacing that car, or if it had already been fixed, for any extra costs needed to restore it to its previous condition.

Your insurance company will typically set your deductible at $500 or less and some policies may not include one at all.
When you choose a deductible amount, you’re essentially choosing how much of an expense you want to cover yourself rather than relying on your insurance company.

A higher deductible means more money saved on monthly premiums but more money paid out when something happens.

Personal injury protection (PIP)

This is a state-mandated auto insurance policy that covers your medical bills and lost wages after an accident, no matter who caused it.
Personal injury protection will also cover you if you’re hit by a car while walking or riding your bike. The minimum required coverage in Florida is $10,000 per person, $20,000 per accident, and $10,000 in property damage.

Many states have similar minimum requirements – check with your state’s Department of Motor Vehicles for details about what’s required where you live.

Medical payments (MedPay): This coverage pays for injuries and related expenses resulting from an accident that is not covered by personal injury protection.

Collision coverage

This type of insurance, also called comprehensive coverage, pays for damage to your car caused by a collision with another object.
Collision coverage is required if you want to avoid getting stuck with a hefty bill for repairs after an accident.

However, it’s important to keep in mind that damage from car crashes often isn’t covered under collision insurance and could lead you down a costly road if you’re not careful.

Comprehensive coverage

This type of auto insurance protects you from having your car totaled in an accident and from some instances where someone else is at fault.
While collision will pay for damages, comprehensive can help with additional expenses such as personal items and medical bills.
You also need liability coverage if you own a car—this pays others’ claims against you if they’re injured in an accident you caused.

Comprehensive and liability are often sold together as full coverage. Most experts agree that if you’re financing a new or used car, full coverage is necessary to protect yourself financially should something happen while it’s your responsibility.

Standard car insurance policy definitions

Liability insurance pays for injuries and property damage caused by you or your car. Liability coverage varies by state, but it’s usually required for all registered vehicles and is intended to cover between $50,000 and $100,000 in medical costs and other losses per accident.

Your premium will be based on factors like your driving record, credit history, age, location, and safety features in your car.
Learn more about liability insurance. Collision coverage pays for repairs if you cause an accident with another vehicle.

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