What are the different types of auto insurance coverage?
A typical automobile insurance policy has three components. The liability component protects you in case you are held responsible for an accident. Medical payments coverage pays your medical and hospital bills (up to a limit) and the bills of passengers in your car. Collision and comprehensive pay for damage to your car if you are in an accident, the car is stolen, or damage is caused by vandalism or fire.

What’s the difference between collision and comprehensive auto coverage?
The collision portion of an automobile insurance policy pays for damage to your car in an accident, while the comprehensive portion covers damage caused by other factors. Comprehensive insurance covers damage caused by fire, flood, theft, tornado, and just about any other physical damage that is not covered by collision. In all states both of these coverages are optional. However, if you took out a loan to buy your car or if you're leasing, the lender or dealer will require that you purchase collision and comprehensive coverage.

Do I have to buy collision/comprehensive coverage for my car?
The collision portion of an automobile insurance policy covers damage to a car caused by an accident, while the comprehensive portion covers damage caused by fire, theft, flood and other perils. In all states, collision and comprehensive insurance is optional. However, if you took out a loan to buy a car or are leasing the car, the lender or dealer will require that you buy the coverage. After your car is about five years old or you've paid off your loan, you may want to consider dropping the collision and comprehensive coverage. To determine whether it makes sense for you to continue this coverage, consider the value of the car minus the deductible. Compare the answer to your annual premium. For example, you obviously don't need collision and comprehensive coverage if your car is worth only $1,000 or so and you have a $500 or even $1,000 deductible.

What does auto liability insurance cover?
Perhaps the most important type of auto insurance to have is liability coverage. If you cause an accident with your car and injure someone or damage something, auto liability insurance will pay the injured person's medical and repair expenses. Auto liability, which is technically known as 'bodily injury liability' and 'property damage liability,' will protect you in case you are held responsible for an accident. It's not unusual for liability protection to account for more than half of an insurance policy's cost. Without adequate protection, you could easily lose everything you own (and possibly even a large amount of your future earnings) if you come out on the losing end of a major lawsuit.

What is a no-fault insurance state?
In no-fault insurance states, each automobile driver (and his or her insurance company) must pay for their own costs in a car accident, regardless of who was responsible for the crash. In most no-fault states, a person's ability to file a lawsuit after an accident is strictly limited.

Do I need liability insurance even if I live in a "no-fault" state?
A "no-fault" insurance state is a state where each automobile driver (and his or her insurance company) must pay for their own costs in a car accident, regardless of who was responsible for the crash. Even if you live in a no-fault state, you still need liability insurance. That's because each no-fault state has a threshold above which a person who causes an accident can be sued. For example, in some no-fault states a driver can be sued if he causes severe physical injury to another driver. In addition, many states require drivers to purchase liability protection.

What is uninsured/underininsured motorist coverage?
Uninsured motorist coverage pays you if an uninsured motorist hits your car and you are injured. Underinsured motorists coverage will protect you if the driver who crashes into your car has some but not enough insurance.

Why do I need medical-payments coverage under my automobile insurance policy?
The medical-payments coverage in a typical automobile insurance policy covers your medical and hospital bills (up to a certain dollar amount) if you or a passenger is injured in a car accident. You may need to buy the coverage, even if you have a separate health-insurance plan. If you live in a no-fault state, you probably will be required to buy a minimum amount of medical payments coverage, typically called 'personal injury insurance' or 'no-fault insurance.' It covers your medical bills (and in some cases your loss of income if you are disabled) regardless of who is to blame for an accident. If you live in a 'fault' state, you are usually not required to purchase medical payments coverage, but you may want to anyway. Accidents in which no one can be proven negligent won't be covered by liability insurance, and liability insurance will not cover your own injuries in accidents that you have caused. If you already have good health insurance, you won't necessarily need medical payments insurance to cover your own medical bills. But you may want to consider purchasing it if you ever have passengers in your car.

Can I deduct the cost of my annual auto insurance premiums?
As a general rule, you cannot deduct the cost of your annual automobile insurance premiums. However, if you use your car for business, you may be eligible to deduct at least a portion of your annual premiums. Similarly, you might be able to write off a portion of the cost if your employer requires that you use your own car on the job and does not reimburse you for the expense. Check with your tax professional for details.

What can I do if my driving record prevents me from getting an automobile insurance policy?
If you have a poor driving record, getting adequate insurance can be difficult and expensive. But you can't afford to drive without insurance, unless you're willing to lose everything you already own (and maybe even some of your future earnings) if you come out on the losing end of an auto-related lawsuit. In addition, many states make it a crime to drive without insurance protection. Many drivers with poor driving records are able to obtain insurance through state-mandated "assigned risk" programs. The insurers in your state are required to take on poor risks in proportion to how much business the companies do there. You can also purchase auto insurance on the 'nonstandard market.' The companies that offer this sort of coverage are not always the most scrupulous, however, so investigate the reputations and financial health of the prospective insurers before buying coverage from one of them. This coverage is not cheap, but it may be better than the rates that the well-known insurance companies would charge. Paying a stiff premium, while unpleasant, probably beats having to take the bus. Your state's Department of Insurance or Department of Motor Vehicles can help you check the reputation of a nonstandard insurer or provide other advice to help you get the automobile insurance you need.

Do I have to buy liability protection when I rent a car?
When you rent a car, be sure you have insurance that provides liability protection. If you own an automobile, your standard auto liability coverage may cover you when you rent a car. Check to make sure this is the case. If you don't own a car but you do rent cars, purchase car renter's liability insurance at the car rental counter. If you rent frequently, it may be cheaper to purchase a car renter's liability policy from an insurance company. If you rent while on business for your employer, ask your employer if it provides insurance while you're renting on the job.