Do you have enough insurance for your vehicle or enough of the right types of car insurance? In virtually every state, you need some level of cover when you drive.
Given the different range of coverage available, which ones do you need, which ones make the most sense for you?
This overview will get you up to speed on the essentials.
Why you need car insurance
Some form of coverage is the law in every state. While New Hampshire does not have a mandatory insurance law, the state does require you to pay for costs of damage resulting from an accident if you are at fault.
Depending on where you live there could be mandatory coverage for liability, medical payments, personal injury payments, or uninsured/underinsured coverage.
So how do these different types of insurance work?
Liability insurance covers the costs of damage you could do to other people and their property when driving. So if you’re at fault in an accident and other people require medical attention or need to pay for vehicle repairs, your liability insurance would pay for this.
Having a minimum level of liability insurance is the law. This is because you need to pay for the damage you may cause to others on the road. Liability insurance is the way to make sure you can do this.
Liability insurance covers three main areas that have different coverage limits.
- The maximum coverage per injury per person in an accident
- The maximum total coverage for injuries in an accident
- The maximum coverage for property damage in an accident
If you see a liability coverage limit written as 25/50/25, this would mean:
- $25,000 per person injured
- $50,000 total for injuries in an accident
- $25,000 property damage coverage.
What happens if I don’t have enough liability coverage?
If your maximum liability coverage is not high enough to cover all the costs of an accident, you could be exposed to further risk. Therefore you should not think of the state minimums as recommended levels.
For example, in California, the minimum property damage coverage per accident is $5,000. Now factor in how much repairing or replacing another driver’s car could cost. For example, in 2017 the average cost of a used car was estimated at $19,400.
You start to see how this minimum could get used up pretty quickly.
Imagine you had a $10,000 minimum property damage limit but caused an accident with $20,000 worth of damage. In this situation the other driver’s insurance company has the right to come after assets of yours to make up the difference.
This is why insurance agents will recommend higher levels of coverage on your liability insurance.
Personal Injury Protection & Medical Payments
Liability insurance only covers costs arising from damage you may cause to other people while driving. If you just have liability insurance, you have no protection for yourself.
There is nothing to cover repair costs for your vehicle, or for medical treatment you might require.
Medical Payments Coverage, or MedPay covers your expenses for things like medical, surgical, or dental treatment, and could also include ambulance transportation, hospitalization, nursing care, or funeral costs.
Medical payments insurance is not designed to take the place of health coverage. It will only cover you for treatment in the event of an accident.
Personal Injury Protection, or PIP, provides wider coverage. In addition to medical costs, PIP covers therapy costs as well as losses you could sustain by not being able to work. Either Medpay or PIP is a requirement in 16 states.
Despite legal requirements for all drivers to carry liability insurance, an estimated one in eight drivers goes without coverage.
If you are in an accident caused by an uninsured driver, things could get complicated. The driver has no liability insurance to cover your costs.
Taking legal action could be an option, but may not be worth it if the driver has no means to pay your medical bills.
In this situation, Uninsured Motorist Bodily Injury (UMBI) coverage, if you have it, would cover the cost.
If the driver has only a very low level of injury coverage on their liability policy, their insurance might not cover the full amount of treatment you require. In this situation if you have, Underinsured Motorist (UIM) Bodily Injury coverage you have would layer on top of that driver’s liability limits
Uninsured or underinsured motorist insurance coverage is a requirement in 19 states, but in many other states this is standard on most policies.
Even if you live in a state where it is not mandatory, the impact on your insurance premiums is pretty minor. It’s a relatively inexpensive way to protect yourself.
Collision and Comprehensive
The other major area of auto insurance to consider is coverage for your own vehicle. There are two types of cover, comprehensive and collision. The difference between comprehensive and collision works out like this:
Collision insurance covers damage to the vehicle when it is in a collision with an object or another car.
Comprehensive insurance covers other things that could put your car out of action. Damage from storms, floods, earthquakes, a collision with an animal, or vandalism would be covered. Theft of your vehicle is also covered by comprehensive insurance.
The combination of comprehensive and collision insurance is known as full coverage. The term full coverage refers to being covered for all types of damage to your vehicle. Keep in mind that despite the name, this doesn’t actually cover you for every eventuality. Things like PIP or UIM aren’t necessarily counted within ‘full coverage’.
The value of getting full coverage vs. liability depends on the age and value of your vehicle. The depreciation of your car’s value after ten years may ultimately mean the payment you would receive to replace the car isn’t worth the extra premium payments.
Collision and comprehensive cover also usually come with a deductible. Since this amount comes out of what an insurance company would pay you, factor this into your calculations when deciding if full coverage makes sense.
If you lease or take out a loan to buy a car, you may require an additional type of coverage. Gap insurance covers you against vehicle damage or theft for a car you lease or still owe money on.
Consider this situation. You’ve bought a new car for $50,000. As soon as you drive it off the lot, it will have depreciated to something like $35,000. Had you borrowed the $50,000 to buy the car, there would now be a $15,000 gap between the car’s value and the amount outstanding on your loan.
If the car is stolen or gets totaled, meaning you need a replacement, your insurance would only cover the value of the vehicle after depreciation. So you would get $35,000 towards a replacement while still owing $50,000 on the original loan. Gap insurance is to protect you being on the hook for that type of shortfall.
New car replacement
However, gap insurance isn’t the only way to protect yourself in this kind of situation.
Instead of purchasing gap insurance you can upgrade your car insurance policy to cover new car replacement.
If the vehicle is under one year old and under 15,000 miles, this would pay out the full value of replacing the car new. Unlike gap insurance where you are just insured for the gap in value, and would still be required to arrange a new vehicle loan and downpayment, new vehicle replacement would mean you just continue making payments as it nothing had happened.
For new cars, this could be a lower cost way of getting coverage when leasing or paying off an auto loan.
In many cases, new car replacement might only add as little as $5 per month to your premiums.
Other types of coverage
There are also further add-ons you can get for your auto insurance policy including:
Rental reimbursement – If your vehicle requires repairs or is completely out of action, you might need a rental car in the short term. Adding rental reimbursement to your auto policy mean these costs would also be covered.
Depending on your insurance company this service could be directly integrated, meaning your insurer will pay the rental company directly. Some car rental companies will also offer to bring the car to you at the repair shop.
Full glass coverage – This covers the cost to repair or replace chipped or broken window glass, without paying a deductible.
Roadside assistance coverage – You can add roadside assistance coverage to your policy to insure against the cost of things like towing, tire changes or lock outs.