Automobile insurance provides such a wide array of protections that it's tough to get anywhere without getting specific. So we'll break the topic into three separate questions: What are third-party coverages and do I need them? What are first-party injury coverages and do I need them? What are first-party property coverages and do I need them? Before we get started with these three specific questions, we should make clear our general bias. Simply stated, Fools always aim for self-insurance through savings and investment. Note that we said "aim" because in many cases this just isn't a practical goal. Nonetheless, it does define our approach. We'd rather funnel insurance premiums into our personal savings accounts, whenever it makes sense, and take our chances with small claims, rather than looking for insurance to cover every unexpected event. With this perspective in mind, let's get started. An insurance policy is a contract between you (first party) and an insurance company (second party). The wildcard is always the other guy -- the third party. When you're piloting a ton of plastic and metal down the road at 60 miles per hour, there's a decent chance that your life will become intertwined with a third party, regardless of how carefully you drive. There's also a good chance that this third party will blame you for any damage done to his car and to his passengers. So, you should be ever-prepared to honor such a claim, and (this is America, after all) your protection should anticipate the possibility that Mr. Third Party will attempt to sue the trousers off you. There are two types of third-party liability coverage: bodily injury liability and property damage liability. The first covers people costs -- medical expenses, lost wages, and pain and suffering. The second covers the cost of stuff -- such as somebody else's car, a telephone pole, or, heaven forbid, somebody's living room window. Both include legal protection up to the limits of your policy if the claimant files suit against you. When it comes to these two third-party coverages, it's not hard to figure out whether you need them. Do you own a car? If so, you need them. In fact, the law requires that you carry these coverages in all but a few states. Even if you live in a "no-fault" state, these liability coverages are important. No-fault laws were enacted to clear out jammed courts, and they eliminate garden-variety, low-dollar injury lawsuits as well as most claims for "pain and suffering." But no-fault laws will not save you from serious, mega-dollar injury claims that could lead to bankruptcy. Even pain and suffering claims are allowed under certain conditions. Remember, the potential for these low-probability, high-impact events is exactly why you buy insurance in the first place. Each state has minimum required levels for these two third-party liability coverages. If you have assets or income to protect, however, these minimums won't be enough for you. You'll probably want a lot more coverage. Keep in mind that one ugly claim could clear out your savings and brokerage accounts, force you to sell your house, and could even attach itself to your future earnings. Extra liability coverage is reasonably priced and should correspond to the level of assets you are protecting, not state minimums. This is not a good place to save a buck. No-fault restrictions on pain-and-suffering lawsuits Tort CO FL HI KS KY MA MI MN NJ* NY ND PA** UT Death Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Dismember- ment Yes Yes Yes Yes Yes Yes Yes Yes Yes Loss of bodily function Yes Yes Yes Yes Yes Yes Yes Serious disfigure- ment Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Permanent injury or disability Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Fracture Yes Yes Serious fracture Yes Yes Yes Yes Yes Temporary disability or loss of earning capacity Yes Yes Yes Yes Yes Dollar threshold $2,500 Verbal $5,000 $2,000 $1,000 $2,000 Verbal $4,000 Choice or verbal Verbal Choice Choice $3,000 Source: American Insurance Association Note: "Yes" indicates that recovery of pain and suffering damages is allowed. Dollar threshold means the amount of injury at which you can begin to sue for damages. * In New Jersey, policyholders have the option to choose a standard policy (choice) or a basic policy (verbal). The standard policy allows you choose whether you want to sue for damages, regardless of the severity. The basic policy allows you to sue for pain and suffering if you are injured in one of the categories labeled "Yes" in the table above. The New Jersey definitions for "verbal" and "choice" apply to Michigan, New York, and North Dakota. ** Limited tort option: No recovery for noneconomic damages unless injuries are "serious" as set forth in the policy; in general, only coverage for medical and other out-of-pocket expenses. Full tort option: May recover for pain and suffering as a result of injuries caused by other driver(s) in addition to all medical and other out-of-pocket expenses. All 50 states have different requirements when it comes to auto insurance. In some states, motorists can't register a car without showing proof that they have liability insurance, while other states use an "honor system" that doesn't ask for proof of insurance until drivers have accidents or tickets on their records. Only five states do not require motorists to carry liability coverage, but those that do demand that drivers purchase at least the state's minimum. In other words, if you live in a state that requires liability insurance, you can't walk into your insurance agent's office and buy only $2,000 worth of liability coverage. If you're going to buy it, you must purchase at least the minimum amount required. How to read liability limits The following information will help you understand the table of liability limits. First number: bodily injury liability maximum for one person injured in an accident. Second number: bodily injury liability maximum for all injuries in one accident. Third number: property damage liability maximum for one accident. So, looking at the table, you find that in Alabama the minimum liability limits are $20,000 for injury liability for one person in an accident, $40,000 for all injuries in an accident, and $10,000 for property damage in an accident. What is no-fault? Some states have "no-fault" laws, meaning your auto policy must pay medical bills for injuries suffered in an auto accident regardless of who caused the accident. The laws were enacted in an attempt to reduce auto-injury fraud and keep insurance cost down. State Liability required? Liability minimums (in thousands of dollars) PIP required? No-fault state? Uninsured motorist coverage required? Alabama Yes, 20/40/10 No No No Alaska Yes, 50/100/25 No No No Arizona Yes, 15/30/10 No No No Arkansas Yes, 25/50/25 No No No California1 Yes, 15/30/5 No No No Colorado Yes, 25/50/15 Yes Yes No Connecticut Yes, 20/40/10 No No Yes Delaware Yes, 15/30/5 Yes No No Florida2 Yes, 10/20/10 Yes Yes No Georgia Yes, 25/50/25 No No No Hawaii Yes, 20/40/10 Yes Yes No Idaho Yes, 25/50/15 No No No Illinois Yes, 20/40/15 No No Yes Indiana Yes, 25/50/10 No No No Iowa Yes, 20/40/15 No No No Kansas Yes, 25/50/10 Yes Yes Yes Kentucky Yes, 25/50/10 Yes Yes No Louisiana Yes, 10/20/10 No No No Maine Yes, 50/100/25 No No Yes Maryland Yes, 20/40/15 Yes No Yes Massachusetts Yes, 20/40/5 Yes Yes Yes Michigan Yes, 20/40/10 Yes Yes No Minnesota Yes, 30/60/10 Yes Yes Yes Mississippi Yes, 10/20/5 No No No Missouri Yes, 25/50/10 No No Yes Montana Yes, 25/50/10 No No No Nebraska Yes, 25/50/25 No No No Nevada Yes, 15/30/10 No No No New Hampshire No, 25/50/25 No No Yes New Jersey3 Yes, 15/30/5 Yes Yes Yes New Mexico Yes, 25/50/10 No No No New York4 Yes, 25/50/10 Yes Yes Yes North Carolina Yes, 30/60/25 No No No North Dakota Yes, 25/50/25 Yes Yes Yes Ohio Yes, 12.5/25/7.5 No No No Oklahoma Yes, 10/20/10 No No No Oregon Yes, 25/50/10 Yes No Yes Pennsylvania Yes, 15/30/5 No Yes No Rhode Island Yes, 25/50/25 No No Yes South Carolina No, 15/30/10 No No Yes South Dakota Yes, 25/50/25 No No Yes Tennessee No, 25/50/10 No No No Texas Yes, 20/40/15 No No No Utah Yes, 25/50/15 Yes Yes No Vermont Yes, 25/50/10 No No Yes Virginia No, 25/50/20 No No Yes Washington Yes, 25/50/10 No No No Washington D.C. Yes, 25/50/10 No No Yes West Virginia Yes, 20/40/10 No No Yes Wisconsin No, 25/50/10 No No Yes Wyoming Yes, 25/50/20 No No No Now we get into the first party -- you and your passengers. Here we're talking about expenses as opposed to liability. In other words, these are things you'll want covered, even if a court of law doesn't insist that you pay for them. When it comes to injury-related expenses, if the other party is at fault, your first line of defense will be the other guy's third-party liability coverage. Take our advice, though: Don't bank on it. Your odds of a successful claim will depend on many things, including the opinion of others -- including, potentially, a court of law -- and whether the other guy has any insurance or assets for which you can file a claim. Even though liability insurance is required by law, many people -- including 28% of all California drivers, according to a 1995 survey -- still drive without it. Moreover, those who drive without insurance are the most likely to have few assets and little income. Your health insurance (outside of your automobile policy) will cover some of your family's medical costs, and a good disability policy will cover a long-term loss in wages. However these policies might leave holes. Disability insurance covers only family wage-earners, and health insurance only covers your spouse and immediate dependents (not your other passengers). Take a look at your overall insurance situation and see where your potential coverage holes may be. If you find some shortcomings, consider these additional auto policy coverages as the next line of defense: Medical Payments (MedPay) Covers medical and funeral costs for the driver and passengers in your car, regardless of which driver is at fault. Most commonly offered in states that do not have no-fault laws. Personal Injury Protection (PIP) In states with no-fault insurance laws, this coverage is often required. These states place the burden of injury coverage on your insurance policy regardless of who's at fault, so it's tough to sue the other guy. Basically, PIP just extends medical payments coverage to include lost wages. Some states allow you to waive PIP coverage for your family (assuming you already have adequate health and disability insurance), but force you to carry some PIP to cover other passengers in your car. Uninsured and Underinsured Motorist Coverage Welcome to the most confusing auto insurance topic of all. As the name suggests, this insurance covers you and your passengers when the at-fault driver is not properly insured or can't be located (as in a hit-and-run). Essentially, it takes the place of the phantom driver's third-party liability coverage, allowing you to make a claim against your own insurance company for injury costs (we talk about property costs elsewhere. At least this much is straightforward. The question that often arises, though, is: Don't health, disability, MedPay, and PIP coverages already take care of these injury-related, first-party costs? Another good question is: If there are potential injury costs not covered by these other policies, aren't I taking on this risk anyway in those cases where I am at fault? These are tough questions and, since the stakes can be huge, they are not ones that we want to answer for you. We'll just point out a few facts about un/underinsured motorist (UM) coverage and leave the final decision to you: UM coverage is much broader than most health and disability insurance policies. It can compensate you for pain and suffering, loss of limb, disfigurement, and other ongoing costs that may fall outside the bounds of these other coverages. Available coverage limits are usually much higher for UM than for MedPay and PIP coverage. Like MedPay and PIP, UM also covers your passengers who don't have adequate health and disability coverage of their own. Since UM coverage is relatively inexpensive and can turn out to be incredibly valuable, in the right situation, many experts recommend buying it at coverage levels that match your choices for third-party bodily injury liability. In some states, UM coverage is mandatory. Often, though, you can't buy more un/underinsured motorist coverage than you have in third-party bodily injury liability coverage. This is the most straightforward of the three main coverage areas. First-party property is just your stuff. In the world of auto insurance, this usually means your vehicle. Collision insurance covers damage to your vehicle resulting from an automobile accident, regardless of who is at fault or even whether there was another car involved (sorry, you can't insure your pride). In the event that someone else is at fault, your insurance company may go after the other guy's company for the money, but this won't matter to you. Your collision insurance covers you either way. The poorly named comprehensive insurance covers damage to your vehicle that is not caused by an automobile accident. Common examples include hail damage and theft. Check your policy to see which acts of nature and fate are covered. With collision and comprehensive coverage, you don't have to choose any limits. It's a yes/no question. If you still have a loan out on your automobile or if you are leasing, you won't even have to make this decision. The bank or lessor will require you to purchase both. If you own your vehicle, free and clear, your decision will depend on its book value. You probably won't get any more than this from the insurance company, regardless of how well you've taken care of your four-wheeled baby. Check your declarations page for a premium breakdown. Collision and comprehensive are usually the two most expensive coverages. If continuing to pay for these premiums will quickly rack up a total bill that closes in on the book value of your vehicle (and you own the vehicle), you should probably drop these coverages. If you purchase collision and comprehensive coverage, your last decision will be the size of your deductibles -- the per-accident, out-of-pocket expenses you pay before collision and comprehensive payments kick in. If you have a comfortable, liquid emergency fund, jack up these deductibles as high as you can stomach. You'll save money on both premiums and premium increases that might result from the small claims that come with a lower deductible. This is one place where self-insurance can save you big money. Finally, some companies will try to sell you un/underinsured motorist coverage that covers your property (before we were talking about UM coverage for bodily injury). If you already have collision and comprehensive coverage, this additional first-party property insurance is probably superfluous. Collision and comprehensive will cover you regardless of fault. *Unless there is a decent chance that an uninsured driver will plow into your house or other possessions, don't bother with this coverage.* There are many factors that affect the premium you'll pay for auto insurance. Each is a statistically based risk for a specific population. The higher the risk associated with a person, the more he or she is likely to pay for coverage. We've elaborated on some of the risk factors below, but there are numerous others, including driver's gender, miles driven per year, purpose for using the vehicle (commuting to work, using for work, leisure only), etc. Age Statistically, the population of drivers under the age of 25 have a greater risk for being in an accident than the population over age 25. The population of drivers between the ages of 50 and 65 tend to have some of the safest records. These are not absolutes, just assessments based on historical data. But age is just one of the many factors used to calculate your premium. If you're a parent, then having your 16-year-old on your policy will be an added cost. If you have more drivers than cars, you can make Junior a part-time, rather than a full-time, driver, and that may lower his premiums. Check with your insurer to see if this is a viable option. Driving record Being liable for an accident or having moving violations on your record (speeding tickets, DWI, reckless driving, etc.) put you at a higher risk for accidents and will likely mean a higher premium. Depending on the state in which you live and insure your car, insurance companies can penalize you for your record for as many as five years from when the incident occurred. The good news is, as your record improves, many companies will lower your premium. Where you live Where you live really can make a difference. People living in areas with little or no traffic are likely to spend less on insurance than those living in congested cities or suburbs. Why? Because areas with a lot of traffic tend to have more accidents. Some areas also have a higher rate of vehicle thefts, which can result in a higher premium. Type of vehicle As we've said, many factors contribute to the cost of your premium, including the make and model of the car you drive. If you have a relatively new, pricey car, it will cost more to repair it. Unless it's been paid off, your lienholder will require you to carry collision coverage on it. More expensive repairs translate into a higher collision coverage premium. As your car ages, however, your premium may decrease. But the book value isn't the only contributor to your premium. Certain cars, regardless of age or initial cost, seem to be exceptionally attractive to thieves, and that can result in a higher premium. Discounts Car insurers offer many discounts that can result in some nice savings. Be sure to ask about them when you're getting a rate quote. Here is just a sampling of things that may qualify you for a discount: Having homeowner's or renter's insurance with the same company A young driver on your policy with an impressive grade point average Taking a defensive driving course Using an approved (by your insurer) anti-theft device in your vehicle Some companies give discounts based on the number of years you've been with them with a good record Housing your car in a garage versus on the street Membership in some professional associations Most policies cover occasional sharing of cars between friends. Check yours to be sure. If somebody else starts to log a significant fraction of your car's total miles, however, you should check with your insurance company. Primary driver variables can play a big role in determining premium prices, and providing false information can undermine the obligation of your insurance company to honor your policy. Typically, insurance coverage "goes with the car." If you injure somebody while driving your friend's car, his policy will probably pay first. If he has no insurance, however, or if you are saddled with more claims than his policy can pay, your own policy should take up the slack. Again, it never hurts to check your policy or ask a company representative to be sure. If your car is stolen, don't worry. You won't be liable for third-party damages caused by the thief, and your collision and comprehensive coverages will still cover damages to, or the loss of, your car. If you have an automobile policy that includes third-party liability, collision, and comprehensive coverages, you can probably decline all coverage offered by a rental car company. Check your policy to be sure, however, especially if you rent frequently. Your own comprehensive and collision coverage should pay for damages to the rental car. You'll still be responsible for your deductibles. If you aren't carrying collision and comprehensive insurance, however, you should probably purchase the loss or collision damage waiver offered by the rental car company. Without it, you could end up buying them a new car. Similarly, your automobile insurance should cover you for third-party damages resulting from your rental. If you have no liability coverage (usually this means that you have no automobile insurance), you should consider the liability coverage offered by the rental car company. Where else will the big money required to pay off legal judgments come from? All other forms of rental car coverage are usually a rip-off. Personal accident insurance is usually just a special-purpose life insurance product, hardly ever a good idea. To cover loss of life, buy life insurance. If your possessions are stolen from the rental.