The good news is, after you’ve finished reading this report, you’ll know the different parts of an car insurance policy and how to buy the right one for your individual situation.

Liability insurance is what most states require for a licensed vehicle to be driven on public roads. It protects you and your assets if you cause injuries or damages to other people or their properties in an auto accident in which you were at fault. There are two types of liability insurance:

1. Bodily-injury liability
2. Property-damage liability

Bodily-injury liability pays for the injuries you cause to other people, such as medical expenses, rehabilitative care, lost income, as well as the pain and suffering of the injured persons. In addition, it pays for the medical expenses, lost wages, and pain and suffering of any passengers in your vehicle. And it also pays for your legal expenses in case of a lawsuit.

Property-damage liability covers the damages you cause to someone else’s property, such as their car, their home, a store, or anything else you may run into or over.  

Together, the two types of liability coverages - bodily-injury and property-damage -- make up about 40% to 50% of your total car insurance premium.

The liability coverage is usually sold as “split limits,” such as 100/300/50. The first two figures refer to bodily-injury liability limits and the third indicates the property damage liability limit.  

For example: A policy with 100/300/50 split limits would pay each injured person as much as $100,000, up to a maximum of $300,000 in total payments per accident, and up to $50,000 in property damage.

At a minimum, I recommend you buy liability coverage of 100/300/50. But for your added security and peace of mind, you may consider getting more bodily-injury coverage, such as 250/500. Perhaps you might even take out an umbrella policy that boosts that amount to $1,000,000.

Choosing greater bodily-injury coverage, say 250/500 instead of 100/300, may cost you an extra $150 a year. But the additional protection you’ll have will let you sleep more soundly.

Please understand, having $300,000, $500,000, or even $1,000,000 of bodily-injury coverage doesn’t mean you can’t be sued for more than this amount. It only means that that is what your insurance company will pay. Any extra amount will have to come out of your own pocket. So if you’re sued and found negligent or guilty, you could lose all your valuable assets and much more.

Medical payments insurance pays for the cost of medical expenses for you and the passengers riding in your vehicle, regardless of who is at fault. It also protects you when you drive somebody else’s vehicle or if you’re hit by another vehicle as a pedestrian.

Medical payments insurance is relatively inexpensive and is usually available with limits between $1,000 and $100,000. If your health insurance already protects you and your family members sufficiently, you may not need to buy it. Medical payments insurance usually isn’t required by most states.

Personal injury protection (PIP) insurance is a broader form of medical payments (Med-Pay) insurance, and is usually required if your state has mandatory no-fault laws, which I’ll explain in a few moments.

The main differences between PIP and Med-Pay are:

(1) In addition to paying the medical expenses of you and your passengers, PIP also reimburses 80% of your lost income, and (2) if another driver was at fault and you recovered damages from his or her insurance company, then you have to pay back your own insurance company the money you collected under Med-Pay. With PIP coverage, you don’t have to repay your own insurance company.

  What’s A No-Fault Insurance State?

In mandatory no-fault states--Colorado, Florida, Hawaii, Kansas, Massachusetts, Michigan, Minnesota, New York, North Dakota, and Utah -- each driver (and his or her insurance company) must pay for their own costs in a vehicle accident, regardless of who was at fault.

Before discussing the advantages and disadvantages of no-fault insurance, let me give you a brief history of the “no-fault” system.

Before 1966, all states were “fault” states. In this type of system (sometimes known as the “tort” system), the driver who is responsible for the vehicle accident (or his or her insurance company) must pay for the injuries and damages he or she causes to others. If they don’t have enough insurance to pay for the damages, the other party can sue them for payments.

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