5 key types of car insurance — and how they work

When you're deciding how much car insurance you need, it comes down to picking the right types and correct amounts of coverage. You want to make sure you're sufficiently protected without overpaying for the coverage you might not need.

CNBC Select breaks down the types of auto insurance coverage and how they work so you can decide whether to add them to your policy.

Auto insurance requirements vary by state, but almost all states require drivers to carry at least the minimum liability insurance. This essential type of coverage helps for damages and injuries when you're at fault in an accident. The coverage consists of two components:

• Property damage liability, which covers the repair costs of property, such as other vehicles, buildings, fences and more.
• Bodily injury liability, which pays for medical expenses resulting from an accident.

In your policy, the limits for this coverage are most likely expressed in three numbers — the bodily injury per person limit, the bodily injury limit for each accident, and to total property damage limit per accident. For example, if you see 25/50/10, that means you get $25,000 in bodily injury per person and $50,000 in total bodily injury payout per accident, as well as $10,000 in total property damage per accident.

This is another type of coverage that your state might require. It financially protects you in case you or your passengers are injured, or your vehicle is damaged in an accident caused by another driver without sufficient insurance.

Some drivers might opt to carry only this and/or liability insurance coverage to comply with state laws as a way to save money. Auto-Owners Insurance, for example, is a great option in such cases as it offers especially affordable minimum coverage. It also ranks highly for customer satisfaction.

However, when you carry the minimum amount of insurance required, you leave yourself vulnerable to the financial distress that an accident can cause. From medical expenses and lost wages to repair costs and sometimes legal fees, a single accident can wreak havoc on your finances — especially if you're found at fault. Plus, minimum coverage doesn't protect you in instances of theft, vandalism and car theft.

To avoid that, you may need to significantly increase the amount of insurance you carry and add additional types of coverage to your policy.

As the name implies, collision coverage applies when you collide with another vehicle or object, such as a fence or guardrail. It can cover repairs or replacement of your car if it's totaled.

Note that while this coverage is optional, your lender is likely to require it if you're financing or leasing a car.

Often coupled with collision coverage, comprehensive insurance covers most damage that collision insurance doesn't. This includes damage due to vandalism, accidents with animals and certain weather events. It can also provide coverage in case of theft.

Like collision insurance, this type of coverage is typically optional but may be required by your lender.

Collision, comprehensive and liability insurance are sometimes referred to as full coverage when combined. Such coverage can protect you in a wide variety of situations, from certain types of crashes to losing your car to theft. However, it's typically much more expensive compared to minimum coverage.

That's why it's important to shop around for auto insurance so you can compare multiple quotes and pick the best deal. We recommend looking into providers such as Nationwide which offers more affordable premiums for full coverage. Plus, it's available in most states, so you shouldn't have any trouble obtaining insurance.

Personal injury protection can help with medical expenses if you or your passengers are injured in an accident — even if you're at fault. In addition, this coverage can help pay for financial losses caused by the accident, from lost wages and child care to funeral costs.

In 15 states, the law requires you to have personal injury protection insurance. If your state doesn't require either, you may want to skip it if you have good health insurance. Just remember that your health insurance policy won't cover lost wages or any services you might need while recovering from an accident.

Before you purchase car insurance, make sure you understand what each type of coverage can help you with. And if something isn't clear, it may be a good idea to ask your insurance agent. Once you know what kind of coverage you want and how much, make sure to call several providers and compare quotes. This way, you'll be able to find a solid deal.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance guide is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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