Choosing Auto Insurance Coverages: What Coverages Do You and Don’t You Need?

Currently, most states require you to buy auto insurance, and some even ask for proof of insurance when you register your vehicle.  But choosing the coverages for your auto insurance policy can be very confusing.  What do you need?  What can you do without? How can you save money?

Auto insurance coverages fall into some broad categories.  They are, in general, Medical Payments, Collision, Comprehensive, Liability (Bodily Injury and Property Damage), Uninsured/Underinsured Motorist, Rental Car, and, if you live in a no-fault state, Personal Injury Protection (PIP).

Liability Insurance
Whether or not you are required to purchase insurance in your state, everyone should carry liability insurance.  Why?  If you injure someone in an accident and damage their vehicle, you could be held liable for their medical expenses, lost wages, pain and suffering, and for fixing their car.  You may become financially responsible for “making them whole” if you were at fault for the collision.  If you have liability insurance, your insurance company will cover the medical-related expenses (bodily injury coverage) and physical damage to the vehicle (property damage coverage) up to the policy limits you agreed to purchase.  And if the other driver and/or passengers decide to sue you, your liability insurance provides for legal representation, as well.  Imagine having to pay for all of that out of your own pocket!

You will see Bodily Injury limits written as 15/30, 25/50, 30/60, 100/300, 500/1 mil.  The first number is how much coverage is available per injured person, so 15/30 would mean $15,000 per person.  The second number means how much coverage is available per accident.  With 15/30, if there are 3 occupants of the vehicle, and they are all injured, there will be a total of $30,000 coverage for everyone’s claims combined.  You can see how with serious injuries, that wouldn’t go very far, and you’d be responsible for the rest.  Buy as much Bodily Injury coverage as you can afford.

The other type of liability insurance is Property Damage.  This is coverage for damage to the vehicle you might have rear-ended, or the sign you might have hit when you ran a stop sign, for example.  It will pay for other people’s property to be repaired.  As with Bodily Injury, there are limits of coverage depending on how much you want to spend on your premium.  I haven’t seen lower than $10K, but if you hit a brand new BMW, that won’t go very far, so again, buy as much coverage as you can afford, or you’ll be paying out of your own pocket.

Uninsured Motorist/Underinsured Motorist Coverage
Uninsured Motorist/Underinsured Motorist (UM/UIM) coverage is similar to liability insurance, but instead of paying for the other party’s damages, it takes care of you and your passengers in case you are involved in an accident with an at-fault driver who does not have or has too little insurance.  In many states you don’t have to buy UM/UIM coverage, but I highly recommend it.  Here’s why.  If you or your passenger sustains serious injuries in an auto accident, even if you have health insurance and Medical Payments insurance (see below), neither of these will compensate you for your lost wages, your pain and suffering, and any other injury-related costs you incur.  The UM/UIM insurance is meant to take the place of the liability insurance the other driver should have had but didn’t.  If you have an accident with an uninsured or underinsured driver, you’ll be happy you planned ahead and bought this coverage.

Medical Payments Coverage
Medical Payments coverage, (Med Pay) is insurance which pays your medical bills up to the policy limits you choose, at levels of $1,000, $5,000, $10,000, $25,000 or higher.  If you have health insurance that covers you for emergency room visits, doctor visits, hospitalization, etc. either without a deductible or with only a small deductible and/or co-pay, it may not be worth it to you to pay the additional premium for Med Pay coverage for yourself.  But if your health insurance is a fairly high deductible coverage, or you have large co-payments, you may want to consider Med Pay coverage to take care of your injury-related expenses as well as those of your passengers.  It will cover all reasonable and necessary medical costs without any deductible up to the policy limits you choose.

Personal Injury Protection
Personal Injury Protection (PIP) coverage is only found on no-fault policies currently available in 12 states* and the District of Columbia.  It generally pays for the insured and his or her passengers’ medical bills, lost wages, pain and suffering and other non-economic damages up to the policy limits, and in no-fault states, its purchase is mandatory.  Most of those states also sell Med Pay coverage which is a supplemental insurance and that is optional. 

Collision Coverage
Collision coverage is not mandatory and not always advisable.  It depends on how old the car is that you are driving, and how much money you have available to pay the premium, because it can be expensive.  If you have a fairly new car, I would recommend you shell out the bucks for collision insurance.  If you have an accident, and it is either your fault or the fault of someone without insurance, you’ll get stuck with the repair bill unless you have collision.  Yes, you will likely have to pay a deductible, but body shops charge an arm and a leg to repair cars these days, and what seems like a little dent or scratch could cost you hundreds, or thousands of dollars. (A higher deductible means a lower premium.)  If, however, your car is older, say 7 years or more, then it’s a closer call. 

While there is no set rule for determining when collision coverage becomes unnecessary for your particular situation, there are some simple considerations if you’re debating whether or not to put it on or keep it on your policy.  Factor in the value of your car, (consult the Kelley Blue Book or NADA Guide) and include the condition of your vehicle when making this determination and how much your premium will be for collision coverage depending on the deductible amount.  Then think about how much you can afford to spend out of pocket to repair or replace a car.  What's best for you right now given your financial circumstances?  Before you decide, also consider more than just money factors. If you drop collision coverage and have to replace your vehicle unexpectedly, are you able to spare the time it takes to shop for a new car? If you're without a car for a few days, will you be able to get to work or other scheduled engagements without your vehicle?

Comprehensive Coverage
Like collision coverage, comprehensive is not state mandated.  If you lease a car, the finance company may require that you carry it.  It covers your vehicle for damage resulting from incidents other than collision, and for theft.  For example, it covers damage caused by fire, flood, animals, vandalism, rocks hitting your windshield, etc.  There is always a deductible, and they generally start a bit lower than for collision, such as $50, $100, $200, $250, and $500.  A higher deductible means lower premiums. 

If you have a newer vehicle or one in excellent condition, I would recommend buying this coverage if you can afford it.  Like with collision coverage, if you have an older car or your car is in poor condition, it’s probably not worth it.  Again, it’s a matter of what you can afford out of pocket.  If your car is damaged by flood tomorrow and you have no comprehensive coverage, could you afford to replace the car?  Or would you be better off avoiding that risk by spending money on the premium so it is covered just in case?  Use the same considerations discussed under collision coverage above, and you should be able to come to the right decision.

Rental Car Coverage
Rental Car Coverage is not coverage for when you rent a car on vacation; it is coverage for the cost of a rental car while your damaged vehicle is in the shop being repaired after an accident or other occurrence. If you have another vehicle, or if public transportation is an option, you may not need to shell out the money for this coverage. It is certainly not mandatory, but if you can afford it, it’s nice to have if you do not have an alternative to driving your car. 

That’s pretty much it for the basic coverages you will find on a typical auto policy.  Use these tips to guide you and you should get the coverages you are required to get, those you should have, and those optional ones that make sense for your circumstances.

*Florida, Michigan, New Jersey, New York, Pennsylvania, Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota, Utah and Washington D.C.