What Does Car Insurance Cover?

Young handsome caucasian man looking under car hood.

Car insurance isn't cheap. The average American pays about $1,000 a year for car insurance, according to the most recent data from the National Association of Insurance Commissioners (NAIC).

And what exactly do you get for your money? That depends on your policy. If you're looking for ways to save, or simply want to know you'll be covered should something happen, it might be a good idea to set some time aside to go over your coverage. Studying up on your car insurance coverage before you hit the road can help prevent some unpleasant surprises.

Common Types of Car Insurance Coverage

There are almost as many types of car insurance as there are variations on pizza. But just as pizza includes a few essentials—crust, sauce and cheese—most car insurance includes some essential coverage, each of which protects you against different risks. You can usually customize the amount of coverage to suit your needs, but financing requirements and state law can limit your flexibility.

  • Liability coverage: There are two kinds of liability coverage. Bodily injury insurance covers the costs of injuries; property damage insurance covers the costs of damage you cause to other people's vehicles or property.
  • Medical payments coverage: This coverage pays for you or your passengers' medical costs due to an accident. Some states have personal injury protection (PIP) instead; in addition to medical costs, PIP often covers related expenses such as lost income.
  • Collision coverage: If you hit a vehicle or object, such as a telephone pole, collision coverage pays to repair the damage to your car.
  • Comprehensive coverage: If your car is stolen or damaged by vandalism, hail, fire, windstorms or other natural disasters, comprehensive coverage pays the cost of repairing or replacing it.
  • Uninsured and underinsured motorist coverage: If you're involved in an accident caused by a driver who doesn't have car insurance or doesn't have enough insurance to cover your costs, uninsured or underinsured motorist coverage helps pay for your medical costs (and sometimes your vehicle repairs too).

Additional Forms of Car Insurance Coverage

Once you've got the basics in place, it's time to choose some toppings for your pizza, so to speak. Along with the standard insurance coverage listed above, here are a few other types of coverage you may want to add to your policy.

  • Gap (guaranteed asset protection) insurance: As the value of a car depreciates, you may hit a point where you owe more on your car loan than the car is worth. But if your car is totaled, you still have to pay off the loan. In this situation, gap insurance can pay the difference between your car insurance payout (typically the car's current value) and the amount you owe the lender.
  • Umbrella insurance: A major accident can cause liability or property damage far beyond the limits of your auto insurance policy. If you're sued, you could also face hefty legal costs to defend yourself. Umbrella insurance offers additional coverage to protect you in situations where your insurance coverage isn't enough to cover the costs. Typically starting at $1 million worth of coverage, umbrella insurance policies can give you peace of mind and protect your home and assets.
  • Roadside assistance: You can add this insurance to provide roadside assistance if your car breaks down or if you run out of gas, lock your keys in the car or have a similar emergency and need help.
  • Rental reimbursement: This insurance covers or reimburses the cost of renting a car while yours is in the shop for covered repairs.
  • Pay-per-mile auto insurance: If you don't drive very much, you might save money by purchasing car insurance based on your usage. Pay-per-mile insurance charges a base premium and adds a fee (typically a few cents) for each mile driven. The insurer will ask you to install a device that tracks your mileage.
  • Rideshare driving coverage: Do you drive for Uber or Lyft? During the period when you're logged into the rideshare app but haven't yet accepted a trip request, most rideshare companies' insurance doesn't cover you—and your personal auto insurance probably doesn't, either. Rideshare insurance can bridge the gap to provide coverage if you get in an accident in this situation.

How to Decide What Coverage You Need

With so many different types of car insurance coverage, how should you decide what insurance is best for your individual situation? To make the right choice, look for a policy that strikes a balance between ample coverage and manageable cost. Here are some factors to consider:

  • State and lender minimums: Many states require drivers to have a certain amount of liability insurance coverage to maintain their licenses. This is designed to protect other drivers. If you're still paying off your car loan, your lender may also have minimum coverage levels.
  • Your deductible: The deductible is the amount you have to pay before your insurance coverage kicks in. Raising your deductible can reduce your insurance premiums, sometimes substantially. Before increasing the deductible, however, be sure you have enough savings that you could easily cover the larger deductible if necessary.
  • The age of your car: Collision and comprehensive coverage pays for damage to your car, but as your car gets older, you can save money by reducing these coverages or dropping them altogether. If your car is worth $3,000 and you have a $1,000 deductible, for example, you'd only receive $2,000 if it were totaled. That's not enough to replace the car, so instead of paying for comprehensive and collision coverage on the older vehicle, consider pocketing the difference and using it to save for a down payment on a new car.
  • Your assets: If you have a lot of assets, such as a home, savings, retirement funds or investments, you'll need more coverage, such as umbrella insurance, to protect them. If you're a new college grad just starting out in life, you can get by with less coverage since you likely don't have as much to lose.
  • Your budget: Like everything else, your choice of insurance coverage has to fit your finances. If you can't afford the premiums of the car insurance you need, assess your budget to see where you can squeeze out more money. Talking to an insurance agent can help you make sure you get enough coverage to protect yourself without spending too much.

Get the Car Insurance Coverage You Need

Depending on where you live, your credit score could affect the premiums you'll pay for car insurance, so it's a good idea to check your credit report and credit score before you apply. Unless you live in California, Hawaii or Massachusetts, where the practice is illegal, insurance companies generally use a credit-based insurance score to assess how much of a risk you are. Although this score is different from your regular credit score, people with poor credit often have to pay more for car insurance. Additionally, insurers in Michigan can't look at your credit score to help them determine your rate. If your credit needs a boost, taking time to improve your score could help you qualify for lower car insurance rates.

By understanding what car insurance covers, working with your insurer and your budget, and maintaining a good credit score, you can get the car insurance coverage you need at a price you can afford.

Learn More About the Best Auto Insurance Coverage for Your Needs