What kinds of coverage do I need?
For starters, you have to purchase any coverage mandated by your state. Most states only require liability insurance, which covers the costs of anyone who's injured or dies as a result of a car crash you caused, plus damage to their vehicle, any property damage and legal fees. But consider these additional types of coverage as well:
- Collision. This covers repairs to your car after an accident, no matter whose fault it was. You generally have to pony up for the deductible, which is a set amount of money you agreed to pay before the insurance company kicks in the remainder. Collision coverage is important -- but only if your car is newer. Let's say you have an older car worth $3,000 and collision coverage that costs $200 per year with a $1,000 deductible. If your car gets totaled, you'd collect $2,000 after paying the $1,000 deductible. That's not a great payback. But if you have a newer car worth $30,000, you'd collect $29,000 after paying the $1,000 deductible. That's more like it!
- Comprehensive. Comprehensive pays for damage to your vehicle from non-crash incidents, such as fire, vandalism, acts of nature and theft. This coverage normally carries a deductible, too. As with collision coverage, whether or not it's wise to purchase comprehensive depends on the value of your car; you can find out what that value is by looking at an online guide such as the NADA Guides at www.nadaguides.com. Check your vehicle's value every year and re-evaluate your collision and comprehensive coverage [source: Zeman].
- Uninsured and underinsured motorist protection. Also called UM and UIM, these coverages may be required by your state. Less expensive than collision and comprehensive, UM and UIM cover the costs of car repairs if an uninsured or underinsured driver hits you. There's no deductible, but there's also typically a limit on how much you'll be able to collect -- generally about $3,500 [source: Zeman].
- Personal injury protection. This coverage pays for medical expenses and lost wages to you or your passengers if someone hits you. If you're injured while riding in someone else's car, it will also cover those medical bills. This is pretty important coverage to carry, although if you're healthy and have a disability policy, you can opt for the minimum coverage [source: Bankrate].