Types of Insurance

A car is an investment, and it pays to get it insured (and your state or lender may require it!). Car insurance is similar to health insurance. There are many different plan offerings and coverages. Before you get a price quote, it helps to know which of these options is right for your car:

  • Liability insurance covers other people’s medical bills, as well as damage to their vehicles, if you cause an accident. Almost every state requires car owners to carry this type of insurance.
  • Personal injury protection covers medical expenses and lost wages for you and any passengers with you at the time of an accident.
  • Uninsured/underinsured motorist coverage pays your medical expenses should an uninsured or inadequately insured motorist cause an accident.
  • Collision insurance pays for accident damage to your vehicle. Most lenders require collision insurance until you pay off your car loan.
  • Comprehensive coverage pays for damages caused by events like hail, vandalism or theft. A lender may require this coverage until you pay off your car loan.
  • GAP coverage helps cover the difference between what the car is worth and what you owe on your loan should your car be totaled in an accident or stolen.

Getting a Quote

Auto insurance costs vary based on your car’s age, make and model, as well as the state in which you live and personal factors like your age and driving record. To estimate how much you’ll pay for auto insurance, request a quote from at least three insurance providers. If you have renters or other insurance, be sure to check with your current insurer, because many will offer discounts for multiple policies. Have this information on hand:

  • The make, model and year of the car you’re considering
  • The zip code for where your car will be parked at night
  • How you’ll use the car (e.g., commute to work or school)
  • Daily estimated mileage
  • Annual estimated mileage (usually around 12,000 to 15,000 miles)
  • The amount you pay out of pocket if you’re in an accident or have mechanical troubles, called a deductible
  • If you currently have car insurance, the carrier, expiration date and length of coverage
  • General idea of your credit rating 
  • Level of education achieved (e.g., high school, college degree)
  • Ask about discounts. Many insurance carriers offer discounts if you’re in the military or if you already have renters or homeowners insurance with them.  

Tip: Some lenders like Navy Federal partner with insurance carriers to offer discounted insurance rates.

Choosing the Right Coverage 

To help determine what coverage you should have, consider these factors:

  • Your finances: You’ll pay more after an accident when you have a policy with a high deductible and low coverage limits. A deductible is the amount of money you must pay for car repairs before your insurance pays for the rest. If paying a large deductible after a claim would be a hardship, you should consider getting higher coverage limits and a lower deductible. (Keep in mind you’ll pay a higher premium for that protection.) You should also consider paying for uninsured and underinsured motorist protection, because many states have relatively low minimum coverage requirements. This extra protection ensures you’re covered even if an at-fault driver lacks sufficient coverage to compensate you for all of your medical and auto expenses.
  • Your assets: If your liability limits are too low to cover the expenses from an accident that you caused, the other party can take you to court and go after your assets, such as your home. Having liability protection that covers more than the minimum state requirements is a good way to protect your assets.
  • Your car: If your car is paid off, you don’t necessarily have to carry collision coverage. If your car is old and the value is very low, sometimes it isn’t worth it.

GAP Coverage

Car insurance companies offer Guaranteed Asset Protection (GAP) coverage to cover the difference between what you owe on a car loan and the amount they’re willing to pay for your vehicle if it’s totaled in an accident or stolen.

Because cars depreciate quickly, you can easily find yourself owing more for a car than it’s worth, which is called negative equity. In other words, the amount of the car you own (equity) is less than zero. A lender would then consider you to be “upside-down” on your loan. Here is an example of how negative equity can happen:

  • You take out a $30,000 loan for a new car worth $30,000.
  • After two months, you’ve made two $500 monthly payments for a total of $1,000, which means you still owe $29,000 on the loan.
  • Due to depreciation, your car’s value has dropped to $26,000.
  • You now owe $3,000 more on the loan than what the car is worth.
  • Should your car be totaled in an accident or stolen, your insurance company would reimburse you for the car’s $26,000 value (minus your deductible).
  • Without GAP insurance, you’d still be on the hook for the $29,000 loan amount, which means you’ll have to pay $3,000 out of pocket.
  • If you had GAP insurance, that $3,000 would be covered by the insurance carrier.

You don’t need GAP coverage if you own the car free and clear or if you owe less on the loan than the car is worth. Also, you may not need GAP coverage if you can comfortably cover the gap with other resources such as an emergency fund. You should consider buying GAP coverage if you meet one or more of the following criteria:

  • The length of your car loan is 60 months or longer.
  • You put less than 20 percent down on the car purchase.
  • Your car has a high depreciation rate.
  • You’re leasing the car.
  • Insurance companies, lenders and car dealerships sell GAP coverage. Dealerships often charge significantly more for this coverage and may require a large upfront payment. Insurance companies typically bill GAP coverage as a small addition to your regular premium. Your lender may offer this coverage as a flat fee that can be financed as part of your loan.

    The cost for GAP coverage averages about 5% to 6% of what you pay for collision and comprehensive insurance. For instance, if $560 of your $1,400 annual premium goes toward collision and comprehensive insurance, GAP coverage would cost an extra $20 to $30 a year. As your vehicle ages, this cost would go down. Eventually, the gap between what you owe and the car’s value will shrink enough that you could cancel your GAP coverage.

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