This article has been reviewed by licensed insurance industry expert Moshe Fishman.
When you purchase car insurance, you're faced with an important question: Should you choose liability or full coverage car insurance? The answer: It depends. Each driver’s needs are unique and choosing the best insurance options should take these needs into consideration. For example, if you own an old car with a low value, it may not be worth investing in full coverage as your annual premiums may be higher than what you would receive as payment from a claim should your car be totaled.
When deciding what coverages are right for you, it’s important to understand the differences between these two types of car insurance and when you should choose one option over the other.
Liability insurance covers you for damages you might cause to someone else's person, property, or vehicle. It does not cover damages to your own car or yourself.
Your liability coverage amount is typically shown as three numbers (e.g. 100/300/100) that each indicate the maximum amount of coverage (in thousands of dollars). In essence, these are your liability limits. Each number, therefore, represents the "maximum amount paid" limit for the following damages caused by a single accident that you caused:
For example, your coverage may be stated as: 100/300/100. This example of coverage would mean that you have $100,000 bodily injury (per person), $300,000 in bodily injury liability (per accident), and $100,000 in property damage liability (per accident).
If your liability amount is 25/50/10, your insurance will pay out these maximum amounts in the event of an accident that was your fault:
Liability coverage is required by law within most U.S. states. However, the amount of liability insurance you are required to purchase varies from state to state.
The best way to know how much liability insurance you are legally required to purchase is to look up your state's specific requirements. You can also ask your local insurance agent or insurance company for this information.
Generally, you want to purchase enough liability insurance to cover your assets if you are sued after causing an accident. Unfortunately, if you cause an accident, some people will try to sue you for the maximum amount possible for injuries and damages. These days, with the high cost of medical bills for personal injury, having more coverage rather than less seems like a good idea.
You can purchase a liability umbrella policy to provide even more coverage if you feel it is necessary. These are sold in increments of one million dollars and protect you from personal lawsuits related to your vehicle or home.
Full coverage car insurance adds coverage for the cost of damages to your vehicle when you are at fault. This coverage comes in two forms: collision coverage and comprehensive coverage.
The term "full coverage" refers to a policy providing comprehensive and collision insurance, but you can request an insurance quote or purchase one without another.
Collision insurance covers the cost to repair damages to your car caused by a covered at-fault accident or collision with an object or another vehicle. Here are a few common examples of damages that fall under your collision coverage:
Note, however, that if someone else crashes into your vehicle, they are responsible for paying for those damages. Therefore, they are not part of your collision coverage. If you submit a claim for this through your insurance company, they will likely go to the other driver's insurance company to collect the payment.
Comprehensive coverage pays for damages caused to your vehicle by covered events other than a collision including fire, theft, vandalism, etc. Here are a few typical examples of damages that might fall under your comprehensive coverage:
Your deductible is the amount of money you must pay before your collision or comprehensive coverage kicks in to pay your claim. People typically choose a deductible of $500 or $1000 per claim. The lower your deductible, the higher the cost of the coverage, and vice versa.
In other words, if you are planning to accept more of the responsibility to pay for the damage you cause in an accident, the lower the premium you will pay. But when you choose a lower deductible and your insurance company pays more out in your claim, you can expect to pay higher rates.
Full coverage is required only if you have a loan or lease on your vehicle. This is not a requirement by law but by the bank or other stakeholders. You might also have a deductible requirement, so be sure to check your terms before purchasing car insurance. Once you pay off your loan, you can drop the full coverage if you decide that you no longer need this type of insurance.
In most states, you are required to purchase liability insurance for your car. If you have a loan or a lease, you will also be required to purchase full coverage for your vehicle. If you own your vehicle, you'll need to decide for yourself which coverages you want. Here are a few essential questions to ask before deciding if you need full coverage.
Your comprehensive and collision coverage will both increase your premium. You can determine precisely how much each one costs by looking at your car insurance declarations page or asking your insurance agent or insurer.
Generally, collision coverage is more expensive than comprehensive. Depending on how much each type of coverage adds to your premium, you can decide which you are willing to pay for.
In the event of a claim, your car insurance will only pay out the total value of your vehicle. This means if your car is only worth $2000, and you submit a collision claim for $5000, the insurance company will consider your vehicle totaled. They will only pay the $2000 that represents your car’s worth.
You can find the value of your car by looking at Kelley Blue Book or other similar websites. Once you know your car’s value, compare the total value of your vehicle to the cost of your comprehensive and collision coverage. Then it’s up to you to decide if you are willing to pay for that coverage, knowing you will only get the value of your car back in a claim.
Knowing the key differences of insurance coverages and what your insurer will pay for damages can help you make an informed decision on what’s best for your situation. Liability coverage applies to damages you cause to people or property in an accident. In contrast, full coverage applies to damages caused to your own vehicle. And you may not know that full coverage comes in two parts, comprehensive and collision, which you can purchase together or separately.
Remember, liability coverage is required in most states, while full coverage is required by the bank or lender for cars with a lease or loan. Consider the requirements, cost of coverage, and value of your vehicle when deciding to purchase full coverage for your car.