Understanding the different types of car insurance

Car insurance is a legal requirement in almost every state. You must carry a minimum amount of car insurance coverage to register and legally drive your vehicle.

But there are many different types of car insurance – including liability coverage, collision coverage and comprehensive coverage – each with unique benefits. If you own a vehicle, it’s important to understand the various types of auto insurance, which types are required by law, and the benefits of optional coverages.

Key highlights:

• The main types of car insurance are liability insurance, collision insurance and comprehensive insurance.
• Most car insurance companies offer add-on coverages that can provide more tailored financial protection.
• Comparing car insurance quotes will help you find the most affordable policy for your situation.

What are the different types of car insurance?

If you’re shopping for car insurance, it helps to understand the most common types of auto insurance. The four essential types of auto insurance are bodily injury liability insurance, property damage liability insurance, collision coverage and comprehensive.

Personal liability insurance is required in every state, with one exception. New Hampshire doesn’t require car insurance, but if you go without, you need to prove you have the funds to meet the state’s financial responsibility requirements if you’re in an at-fault accident.

Liability insurance

Liability insurance consists of two parts — bodily injury liability and property damage liability.

Bodily injury liability insurance covers your financial obligation when you cause an accident that results in another person’s injuries. Specifically, it will cover ambulance rides, hospitalization, medical bills, and rehabilitation costs.

Bodily injury liability insurance has two policy limits — one for a single person’s injuries in an accident, and one for the total cost of all injuries in an accident. Auto insurance coverage limits are usually written out in three numbers, with the first two typically listing bodily injury limits.

For example, if you have a policy with limits of 100/300/100, the first number (representing $100,000) is your bodily injury limit per person; the second number (representing $300,000) is your bodily injury limit per accident; the third number (representing $100,000) is your property damage liability per incident.

Property damage liability insurance covers your financial responsibility when you cause a collision that results in someone else’s property damage. This part of your policy will cover the repairs to another driver’s vehicle and the structural damage you cause. Property damage liability insurance only has one policy limit, which applies to any property damage you cause in a crash.

The most important thing to understand about liability insurance is that it does not cover your vehicle, your injuries or injuries to your passengers. That is why most drivers should consider adding optional coverage such as collision and comprehensive.

State minimum insurance is something else you should be aware of. Each state has different rules, but most states require a certain amount of liability insurance, called the state minimum. This covers any bodily injury and property damage you cause to others in an accident. The minimum in many states is 25/50/25, which means coverage of $25,000 for bodily injury per person, $50,000 for bodily injury per incident and $25,000 for property damage per incident,

Collision and comprehensive

Collision and comprehensive insurance are types of car insurance that cover physical damage to your vehicle.

Collision insurance pays to repair or replace your car after an accident involving another vehicle or a stationary object, such as a telephone pole.

Collision also covers damage to your vehicle from hitting another car, truck, or van; hitting a building or fence; a rollover accident where no other vehicle is involved.

Collision doesn’t cover any non-collision events or damage to other vehicles or objects. It also doesn’t cover medical bills for you or anyone else.

Comprehensive insurance is designed to pay to repair non-collision damage to your car caused by events that are out of your control. This could include theft, vandalism, weather damage such as hail, falling objects such as tree limbs, and damage from hitting an animal or road debris.

Neither comprehensive nor collision insurance is legally required in any state, but your lender will require both if you have a loan or lease on your car. Without comprehensive and collision insurance, you will have no coverage for damage to your car unless another driver is at fault.

Collision and comprehensive insurance are considered part of a full-coverage car insurance policy.

Full coverage insurance

Full coverage car insurance, which includes collision and comprehensive coverage, is a good option if you want more protection than minimum coverage. Collision insurance pays to repair or replace your vehicle after an accident. Comprehensive coverage, or other-than-collision coverage, pays for repairs after unexpected non-collision incidents, such as damage from fires, floods, vandalism, falling objects, animal strikes and theft.

“There’s no formal definition for ‘full coverage’ since it’s not a real auto insurance term. But it typically refers to a policy that has liability coverage plus comprehensive and collision insurance,” says Mark Tucker, an Allstate agent in Hickory Creek, Texas. “That way, you’re not only covered if you have to pay for someone else’s injuries or car repairs but also for repairs to your own vehicle.”

Full coverage insurance is not a legal requirement in any state. However, it’s often a lender requirement for drivers who lease or finance their vehicles. Because the lender owns the vehicle, it has an insurable interest and can mandate its own insurance requirements.

By default, the collision and comprehensive insurance policy limit is your vehicle's actual cash value (ACV). ACV represents the value of your vehicle today, factoring in depreciation due to age and normal wear and tear. For instance, if your vehicle’s ACV is $10,000, that is the most money your insurer would pay out for a covered physical damage claim.

Another thing to know about collision and comprehensive insurance is that they typically require a deductible. This is the portion of the claim you are responsible for paying out-of-pocket. For example, if you file a claim for $2,000 and you have a $500 deductible, your settlement would be $1,500.

Choosing higher collision and comprehensive insurance deductibles will result in a lower monthly premium and vice versa.

How much do different car insurance coverages cost?

Average rates vary considerably from driver to driver, location to location and insurer to insurer. The table below presents the average rates from some of the country’s bigger insurance companies.

The rates below were collected from auto insurance comparison site CarInsurance.com and its data partner Quadrant Information Services for single, 40-year-old male and female drivers of a 2023 Honda Accord LX with a good insurance score and no violations on their record for full coverage insurance policy with liability limits of 100/300/100 and a $500 comprehensive and collision deductible.

Other optional car insurance coverages

Besides collision and comprehensive insurance, there are several other optional coverages that can provide valuable financial protection for many drivers. Here are some of the most common add-ons that most car insurance companies offer:

• Personal injury protection (PIP): This will cover medical bills for you and your passengers after an accident, no matter which driver was at fault. It also covers lost wages and funeral expenses. This policy is mandatory in most no-fault states and is optional in other states.
• Medical payments insurance (MedPay): This will pay for your and your passenger’s medical bills after a crash. MedPay provides less coverage than PIP, but typically has lower premiums.
• Uninsured/underinsured motorist insurance: This will cover your losses if you get into an accident with an uninsured driver or one who can’t pay for your losses in full. This policy also covers hit-and-runs. There are a few states where uninsured and/or uninsured motorist insurance is required.
• Gap insurance: Gap stands for “guaranteed asset protection” and benefits drivers who lease or finance their vehicle. If your car has negative equity and gets totaled, gap insurance will pay the difference between its value and the remaining loan balance.
• Rental car reimbursement: If your vehicle needs to be repaired after an accident or other physical damage claim, rental car reimbursement will pay for a rental car. A daily limit or maximum number of days is typically attached to this benefit.
• Rideshare insurance: People who drive for rideshare services like Uber and Lyft should strongly consider rideshare insurance. This policy fills the coverage gaps between your personal car insurance policy and the rideshare company’s policy. Rideshare coverage may be offered as an endorsement or a separate policy depending on the insurer.

Our recommendations

Car insurance is legally required in every state except New Hampshire. Most states require a minimum liability insurance, but it’s insufficient for most drivers. 

When choosing car insurance, it’s important to consider your lifestyle. For example, if you live in a densely populated area, the risk of a collision is higher, so you should choose full coverage over minimum coverage. If you drive infrequently, look for companies that offer low-mileage discounts or pay-per-mile insurance, which could help you get a lower rate. If you have young drivers on your policy, opt for higher coverage limits or add endorsements, like accident forgiveness.

If you want physical damage coverage for your vehicle, purchase a full coverage policy instead. Add gap insurance if you want the most coverage for your leased or financed car. Many insurers offer multiple ways to customize your policy.

Expert advice on choosing the right coverage

Every driver has different car insurance coverage needs. Before you purchase a policy, it’s important to consider your individual situation and risk tolerance.

“When you’re shopping for car insurance, check to see what the requirements are in your state, and learn what each type of insurance covers,” Allstate agent Tucker says. 

Then, you can decide what other types of coverage you might need. No matter what type of insurance you’re considering, it’s important to pay attention to the coverage limit, which is the highest amount your insurer will pay out in case of a claim.

“Look at the coverage limits of the policy, and make sure it meets your and your family’s needs,” says Breanne Armstrong, director of insurance intelligence at J.D. Power.

For example, if you have young drivers insured on your policy, you might opt for higher liability coverage limits and umbrella insurance, which will give you more protection in case of an accident. And if you want coverage for your vehicle, make sure to choose full coverage.

Another thing to consider is how often you drive. If you drive infrequently or have a very short commute, you might benefit from getting pay-per-mile insurance, which charges you based on distance driven, rather than a flat monthly rate.

Armstrong also suggests looking into usage-based insurance if you are a safe driver.

“Usage-based insurance … factors in driving behaviors, like braking, acceleration, when and where you drive, and the number of miles you drive, when determining your premium. Usually, it results in a discount that is applied to your premium and requires usage of an app or dongle to monitor your driving,” he says. 

Finally, before purchasing a car insurance policy, ensure you understand what it covers – and doesn’t.

“It’s crucial to read through your auto policy documents or ask your agent or insurance company for a policy review,” Armstrong says. “Not understanding your policy can lead to gaps in your coverage or paying more for insurance than you should be.”

How much does car insurance cost?

The average cost of car insurance for a 40-year-old driver is $1,895 per year or $158 per month. However, car insurance premiums are personalized to each driver depending on unique factors.

“The cost of auto insurance depends on how much protection you want from your policy, plus other factors, like how often you drive, the type of vehicle you drive, the auto insurance requirements in your area, and your chosen deductibles,” Tucker says.

Here are some other criteria that can affect your auto insurance premium: 

• Location
• Age
• Gender
• Credit score
• Driving history
• Claim history
• Vehicle make/model 

Your state’s minimum coverage is the cheapest car insurance you can legally purchase. Opting for full coverage is more expensive, but you’re paying for extra protection.

“The cost of full coverage is usually double or triple the cost of minimum coverage,” Armstrong says.

To find the most affordable car insurance for your situation, compare quotes from multiple carriers. You should also shop for car insurance quotes after a major life event, like moving, adding a teen driver to your policy, getting married or divorced or getting into an accident.

How to save money on car insurance

If you want to save money on auto insurance, you can do several things. Here are some tips for reducing your monthly premium:

• Ask about discounts: Many insurers offer discounts for smart students, claim-free drivers, completing a defensive driving course, enrolling in automatic payments, insuring multiple vehicles and more.
• Bundle your policies: You can often save significantly on your car insurance if you bundle multiple policies – an auto policy with home insurance or renters insurance.
• Pay your premium in full: If you can afford to pay your annual insurance premium upfront and in full, many insurance providers will give you a small discount on your policy.
• Improve your credit score: In many states, car insurance companies consider your credit score when calculating your rate. Improving your credit score can help you get a cheaper insurance premium.
• Choose higher deductibles: For car insurance policies that require a deductible, selecting a higher deductible will result in a lower monthly rate.

Factors to consider when shopping for car insurance

When you’re shopping for car insurance, you should consider the following factors when choosing coverage:

• Coverage for you: Most drivers can benefit from having car insurance that pays for medical expenses, like MedPay and PIP. Uninsured/underinsured motorist insurance can also provide valuable protection for drivers.
• Coverage for others: Liability insurance covers other people’s injuries and property damage when you cause an accident. If you want more coverage for your financial obligations, consider getting higher coverage limits – limits of 100/300/100 are good for most drivers.
• Coverage for your vehicle: Only collision and comprehensive insurance will provide physical damage coverage for your vehicle. Unless you drive a very old car with a low value, most drivers can benefit from these policies. While you will pay a higher premium, you will have financial protection if something happens to your car.

Common car insurance terms to know

To help you navigate the car insurance shopping process, it can be helpful to understand common terminology. These are some of the terms that you will come across when choosing auto insurance:

• Premium: The premium is the price you pay in exchange for car insurance. Depending on the insurer, you will either have a six-month or 12-month insurance premium. You can choose to pay upfront or in monthly installments.
• Coverage limit: The coverage limit or policy limit is the upper limit that your insurer will pay for a single covered claim. If a claim exceeds the coverage limit, you must pay the difference out-of-pocket.
• Deductible: A deductible is the amount of money you must pay for a covered claim before the insurer will reimburse you. You will receive a lower monthly premium when you choose a higher deductible – but make sure you have the deductible amount in savings.
• Endorsement: An endorsement is an add-on policy or optional coverage that can be added to your car insurance. Endorsements fill gaps in your standard policy and can be used to customize your coverage.
• Claim: A claim is any loss covered under your car insurance policy. If you get into an accident or your vehicle gets damaged, you can file a claim to get reimbursed for the cost of car repairs or your medical bills. 

Bottom line

Car insurance is not a one-size-fits-all. There are many different types of car insurance, and each driver has different coverage needs. For some drivers, a full coverage policy might be sufficient. For others, having a more customized policy with multiple endorsements provides more peace of mind.

Before choosing car insurance, consider your coverage needs and situation. Getting personalized quotes from a few different insurance companies is also a good idea. Comparing quotes will help you find the most affordable policy.

Methodology

Editors collected rate information from auto insurance comparison site CarInsurance.com and its data partner Quadrant Information Services for single, 40-year-old male and female drivers of a 2023 Honda Accord LX with a good insurance score and no violations on their record for full coverage insurance policy with liability limits of 100/300/100 and a $500 comprehensive and collision deductible.

We analyzed more than 53 million quotes, more than 34,000 ZIP codes and 170 insurance companies nationwide.

Note: 100/300/100 means up to $100,000 for the medical bills of those you injure, up to $300,000 per accident for bodily injury liability for all persons injured in one accident, and $100,000 to repair other drivers’ cars and property that you damage.