Auto Insurance Coverage Types

Liability coverage is the primary – and usually mandatory – part of the auto insurance equation. Liability means what the word implies: it saves your bank balance when you're liable for destroying someone else's car or body parts. Liability is usually quoted as a three-part number like "100/300/50." Respectively, that means for any one incident, you're covered for $100,000 in bodily injury per person, $300,000 in bodily injury total, and $50,000 in property damage. 100/300/50 happens to be the minimum coverage recommended by the industry. And while we all know how much to trust them, the numbers aren't such a bad idea for a typical person with a healthy supply of assets to lose. Without adequate coverage, one at-fault collision with a five-passenger BMW could mean kissing your beachfront mansion goodbye.

Right now, 10/20/5 is the lowest state-mandated number while 50/100/25 marks the highest. South Carolina, Virginia, Tennessee, New Hampshire, and Wisconsin are the five states that do not require liability.

The other key insurance types are collision and comprehensive. While they have nothing to do with each other, they're often referred to collectively because they share two significant traits: they're expensive and they're usually optional.

Let's start with collision, which is not to be confused with liability. Liability pays the bills for damage you cause to the other party; collision covers damage done to your own car. If someone else totals it, his liability pays for repairs (assuming he doesn't hit and run), so if you can follow the aforementioned tip of not crashing, you generally shouldn't need collision. In simplified terms, buying collision insurance can be thought of paying someone to save you from yourself. The safer you drive, the less necessary it becomes.

The thing about both collision and comprehensive insurance is that when your car's value drops below a certain amount, neither coverage is worth owning. Consumer Reports recommends that when the cost of either premium amounts to 10% of your car's value, drop it. 10% is as good a number as any, but if you want to come up with your own magic mark, just ask yourself this unanswerable question: what is the likelihood that my car will get hit/stolen/melted/etc.? Collision and comprehensive are optional except in the case of new leased or financed cars you don't own. Understandably, no lessor wants your problems to become his problems.

You can get an idea of the maximum you'd ever get from your insurance company by turning to the big blue book to determine actual cash value. Actual cash value isn't the same as the replacement cost, which for some cars (ones with rare or expensive parts), might be a lot more.

The bottom line is that together, collision and comprehensive amount to a fat portion of your total insurance. Dropping them can cut your bill to less than half. In the case of this author, the total plunged from over $1,000 a year to $405. If you can't justify dropping them entirely, then at least keep your deductibles (the portion you pay in any claim) high. Diminishing returns comes into play, however: jumping from a $250 deductible to $500 saves a lot, jumping from $500 to $1,000 saves less, etc. Keep it at $500 at least.

Uninsured/underinsured motorist coverage, required by most states, is always a good idea knowing that 17% of drivers out there don't have any insurance, and a lot of the rest probably skimp by on the sometimes-inadequate state minimums. This usually varies in tandem with the body injury part of liability. Don't sweat it too much, as the premium is a mere fraction of liability.

Personal Injury Protection (PIP) or Medical Payments (MedPay) provides reimbursement for medical bills of you and your passengers regardless of who's at fault, and for resulting lost wages. This is an option – one that those with good health insurance plans might not want to exercise.

Rental reimbursement simply pays for the cost of renting a car. Even if it costs $30 a year, why bother? $30 basically buys a one-day car rental, so it's hardly worth it unless you get stranded a lot. (In which case, you might want to switch cars.) If you own a second car, this is completely unnecessary. The same reasoning applies to towing insurance and the like.

An option for lease car drivers is GAP insurance, which covers the difference between what the car is actually worth and what you owe. This might be an attractive proposition for a car that with heavy depreciation, which is a symptom suffered by young cars in general. A $20,000 car might drop to $12,000 in market value after a year. If you total the car at that point, $12,000 is all you'll get from your insurance company, yet you're still obligated to the $16,000 in payments that still remains. Obviously, $4,000 is one gap you'll want closed.