You Need to Understand These 4 Types of Car Insurance Coverage

Drivers need to buy car insurance. Most states require liability insurance, which pays for damage a policyholder causes others. But motorists typically need to go beyond just buying liability insurance in order to protect their assets and their bottom line.

In fact, there are four kinds of car insurance that everyone needs to understand so they can make an informed choice about whether buying additional coverage is the right financial decision.

1. Collision coverage

Collision coverage is insurance that would pay for a policyholder's own damages. This is the policy that would pay out if:

• The policyholder caused a crash they were at fault for and damaged their own car
• The policyholder was involved in a single vehicle accident
• The policyholder crashed into an object like a tree or fence

Without this type of insurance, a policyholder who got into any kind of accident would not have any coverage to pay for fixing their car or replacing it if it was too badly damaged to fix. The driver could be out many thousands of dollars.

Many people who are paying on an auto loan are required to buy collision coverage, because the lender doesn't want to be left with no collateral if something damages the vehicle.

2. Comprehensive coverage

Comprehensive coverage pays for the policyholder's losses if things go wrong other than a collision. Examples of covered perils for this insurance include:

• Hail damage
• Glass and windshield damage
• Vandalism
• Theft
• Fire
• Other acts of nature

Again, without this coverage, a driver would have to pay to repair or replace their stolen car, broken windshield, or otherwise damaged vehicle. Many lenders also require this kind of insurance coverage for the duration of an auto loan.

3. Uninsured motorist coverage

If a driver without insurance causes an accident, the victims would not be able to pursue a personal injury or property damage claim against the at-fault driver's insurer. They could sue the at-fault driver personally, but would likely find that the person who caused the crash doesn't have very many assets to pay damages.

Uninsured motorist coverage would step up to pay for the losses the uninsured driver should have covered. Since around 1 in 8 drivers lacks the required insurance coverage, going without uninsured motorist coverage would mean taking on a fairly large risk of financial loss.

4. Gap insurance

Many people owe more on their auto loans than their car is worth. In fact, a report from Edmunds revealed that 17.4% of people buying a new vehicle ended up trading in a car that had negative equity. Negative equity means that the car's market value is less than the outstanding amount due on the auto loan. Sadly, the average amount owed by borrowers with negative equity was $4,141 in the fourth quarter of 2021.

This data reflects both an increase in the number of people with negative equity as well as an increase in the average amount that car owners were short. For those with negative equity, big problems can happen if a car is stolen or totaled in a crash.

See, the auto insurer will only provide a check for the market value of the vehicle when an insured makes a claim. If the car is worth less than the amount the insurer pays, the vehicle owner could be left forced to try to come up with the remaining balance due to the lender on a car they no longer own.

Gap insurance protects against this, as it pays off any remaining balance due after an insurance payout. While gap insurance is not required by state law, lenders can sometimes require drivers to carry this coverage. It's a good idea for any vehicle owner if they suspect they may owe more than the car is worth at any point.

By making sure to understand all four of these types of auto insurance, drivers can protect themselves against major financial loss that could have a devastating impact on their bank account balance.