Auto Insurance Primer: Liability v. Collision


If you are shopping for an auto insurance policy, it’s helpful to know what types of coverage are available. There are a variety of different types of coverage, but the two main ones are liability coverage and collision and comprehensive coverage. These two types of coverage are almost exact opposites of each other.

Liability insurance covers damages to others that you’re responsible for. In terms of auto insurance, that includes property damage and bodily injury as a result of an accident where you are at fault. All states require drivers to carry a minimum amount of liability insurance on their cars, but minimum amounts vary by state.   

When you have a car accident, liability pays for the other car to be repaired or replaced if it is totaled. It also pays for any damage to property you caused while driving, such as knocking down a fence. If someone is hurt in the accident, this coverage pays for medical bills and lost wages. If you are sued as a result, it also pays for “pain and suffering” damages and your legal bills up to your liability insurance limits.

Collision and comprehensive insurance, on the other hand, covers your own vehicle if it is damaged. Collision pays for repairs if you have an accident, and comprehensive pays for damages caused by something other than an accident like theft, vandalism, fire, natural disasters and such. If the damage is so great that the cost to repair the car is a significant percentage of the car’s value, it may be considered totaled and you may get a cash value payout. The maximum amount you can receive is based on the current value of the car,  not the replacement cost.

States do not mandate that drivers have collision and comprehensive coverage in their auto insurance policies because it only protects the driver. If you want to risk your car’s value by bypassing this type of coverage, the state does not care. In some cases, this may be warranted. Collision and comprehensive accounts for between 30% and 40% of your premium.  So, you can save a lot of money by skipping them. (That is, unless you total your car.)

If your car is an older model and not worth very much, for example, a case can be made for bypassing collision and comprehensive coverage. Say your car is worth $3,000 and your car insurance has a deductible of $1,000. That means you would get a maximum benefit of $2,000. If your policy costs more than $300 a year for collision and comprehensive, it’s probably not worth it. The general rule of thumb is you shouldn’t pay more than 10% of your car’s Blue Book value for collision and comprehensive insurance. If you depend on your vehicle and are not in the position to pay for repairs or buy a new car, this coverage may be worth it to you, however.

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Crash Course On Auto Insurance

10 Ways to Lower Your Auto Insurance Bills

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