Car Insurance Coverage Types: What You Need and What You Can Skip
There are 6 main types of car insurance coverage. Here is what each one does, what it costs, and whether you actually need it for your situation.
Liability Coverage
- Injuries you cause to others in an accident
- Property damage you cause to other vehicles or structures
- Legal defense costs if you are sued
- Your own injuries
- Damage to your own vehicle
- Damage if someone else drives your car without permission
Everyone who drives legally
Nobody — it is legally required in almost every state
Collision Coverage
- Damage to your car from collisions with other vehicles
- Damage from hitting a stationary object (guardrail, tree)
- Rollover accidents
- Damage from theft, weather, fire, or animal collision (that is comprehensive)
- Mechanical breakdown
Required if you have a car loan or lease. Worth having if your car is less than 8-10 years old or worth more than $8,000.
Owners of older, fully paid-off vehicles worth less than 10x their annual premium
Comprehensive Coverage
- Theft of your vehicle
- Vandalism and keying
- Fire and explosion
- Flood and water damage
- Hail damage
- Falling objects
- Animal collisions (deer strike)
- Collision damage (that is collision coverage)
- Personal belongings stolen from the car
Anyone with a car loan or lease. Also worth keeping on most vehicles given its low cost.
Owners of very old, low-value vehicles (under $3,000-4,000) with no loan
Uninsured/Underinsured Motorist (UM/UIM)
- Your injuries when hit by an uninsured driver
- Your injuries when hit by a driver with insufficient coverage
- Hit-and-run accidents (UM coverage)
- Property damage in some states (separate UM property damage coverage needed)
Everyone. Approximately 13% of US drivers are uninsured nationally, and far higher in some states.
Very few situations — this coverage is underpriced relative to its value
Medical Payments (MedPay)
- Your medical bills after an accident, regardless of fault
- Passengers' medical bills
- Funeral expenses in fatal accidents
- Lost wages
- Pain and suffering
Those without health insurance or with high health insurance deductibles. Required in some states.
Those with comprehensive health insurance and low deductibles
Gap Insurance
- The difference between your car's market value and your remaining loan balance after a total loss
- Mechanical issues
- Partial damage
- Extended loan amounts beyond the vehicle's value at purchase
Anyone who owes more on their car loan than the car is worth. Most relevant in first 1-3 years of ownership.
Cash buyers and those with significant equity in their vehicle
What Coverage Do You Need? Decision Matrix
- Liability (required)
- Collision (lender requires)
- Comprehensive (lender requires)
- Gap insurance (recommended)
- UM/UIM (strongly recommended)
- Liability (required)
- UM/UIM (recommended)
- Collision (optional, consider dropping)
- Comprehensive (optional, often worth keeping)
- Gap insurance (not needed)
- Liability (required)
- Collision (strongly recommended)
- Comprehensive (strongly recommended)
- UM/UIM (recommended)
- Gap insurance (consider if you want protection)
- Liability only (just the legal minimum)
- WARNING: You have zero protection for your own vehicle or injuries
- High personal financial risk if you cause or are in a major accident
- Only appropriate for low-value cars with significant savings to self-insure
When to Drop Collision Coverage: The 10% Rule
The 10% rule: if your annual collision premium is more than 10% of your vehicle's market value, dropping collision may make sense. Here are worked examples:
| Vehicle Value | Annual Collision Premium | Deductible | Max Payout After Loss | Verdict |
|---|---|---|---|---|
| $3,000 | $450/yr | $500 | $2,500 | Drop collision |
| $5,000 | $500/yr | $500 | $4,500 | Borderline — consider dropping |
| $8,000 | $520/yr | $500 | $7,500 | Keep collision |
| $15,000 | $650/yr | $500 | $14,500 | Definitely keep collision |
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Frequently Asked Questions
What is the difference between liability and full coverage car insurance?
Liability coverage pays for damage you cause to other people and their property in an accident you are responsible for. It does not cover damage to your own vehicle. Full coverage refers to a combination of liability plus collision (which pays for damage to your car from accidents) and comprehensive (which pays for non-accident damage like theft, fire, and weather). Full coverage is required by lenders if you have a car loan or lease.
What does comprehensive insurance cover?
Comprehensive insurance covers damage to your vehicle from events other than collisions with another vehicle. This includes theft, vandalism, fire, flooding, hail, falling objects (like a tree branch), animal collisions (hitting a deer), and natural disasters. Comprehensive does not cover collision damage or mechanical breakdown. Comprehensive is typically the cheaper of the two physical damage coverages and is worth keeping on most vehicles.
What is gap insurance and who needs it?
Gap insurance covers the 'gap' between what your car is worth at the time of a total loss and what you still owe on your car loan. New cars depreciate quickly (up to 20% in the first year), so if your $35,000 car is totaled in the first year and you owe $32,000, your insurer pays the market value (say $28,000) and you are still responsible for the $4,000 difference. Gap insurance pays that difference. It is most valuable for those who made a small down payment, have a long loan term, or purchased a vehicle that depreciates quickly.
When should I drop collision insurance on my car?
A common rule of thumb: if your vehicle is worth less than 10 times your annual collision premium, dropping collision may make financial sense. For example, if your car is worth $4,000 and you pay $600 per year for collision with a $500 deductible, you would collect at most $3,500 after a total loss. If you have enough savings to cover repairs or replacement, the $600 per year in premium savings compounds quickly. However, if a major repair would cause financial hardship, keep collision regardless of this calculation.