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How to Protect Yourself When Renting a Car

When renting a car, many consumers end up wasting money by purchasing unnecessary coverage. Insurance sales are a significant source of revenue for rental agencies, which is why customers are encouraged to buy insurance. However, many customers are effectively paying for insurance they already have, duplicating coverage and potentially doubling the cost of renting a car. Determining what coverage you need is not easy, and you don’t want to run the risk of being uninsured or under-insured, but you don’t want to throw money away either.

Do I Have to Purchase Insurance When I Rent a Car?

Renting a Car
Key Points:

  • Rely on your own auto policy first, but check your coverage.
  • If you can, add a rider to cover any shortfalls.
  • If you don’t have your own policy, buy a non-owners one instead.
  • Buy umbrella coverage.
  • Pay with your credit card for more coverage.
  • Buy at the desk only to the extent you have to.

Almost all states require drivers to carry some minimum liability insurance if they own a car, but no similar requirement exists if they rent a car. There is consequently no legal requirement to purchase the coverage offered to you by the rental car company.

But make no mistake, you should ensure you have adequate insurance coverage before you drive out of the lot. Driving without insurance carries very real and significant financial risks. The real question is: should you purchase the insurance offered by the rental car company? The answer to that depends on what other coverage options you have.

Rental car companies typically offer up to four different types of coverage:

  1. Collision Damage Waiver (CDW) or Loss Damage Waiver (LDW);
  2. Personal Accident Insurance (PAI);
  3. Personal Effects Coverage (PEC) or Personal Effects Protection (PEP); and
  4. Additional Liability Insurance (ALI) or Supplemental Liability Insurance (SLI).

Below is a description of each type of coverage and your alternatives.

Collision Damage Waiver or Loss Damage Waiver

The first type of coverage you are likely to be offered by the rental company is Collision Damage Waiver (CDW), also known as Loss Damage Waiver (LDW). This is the rental car company’s version of the comprehensive and collision insurance you are likely to have on your existing auto insurance policy. CDW/LDW does not cover bodily injury or loss of, or damage to, your personal property. CDW/LDW coverage generally costs from $8 to $19 per day.

These waivers are not actually an insurance product. They are not underwritten or sold by an insurance company, but rather they are simply a guarantee that the rental company will cover any damage to your rented car. If you decline this coverage, you are accepting responsibility for any damage, which could be up to the full cash value of the car (although you may have other insurance to cover any damage).

Some rental companies may limit your liability to the first $1,000 or $2,000, while others may require you to pay a deductible, similar to your comprehensive and collision insurance. Regulations governing the sale of CDW/LDW vary from state to state.

Be aware that many consumer protection organizations and financial advisors complain that CDW/LDW is expensive and has numerous drawbacks.

Alternative Coverage Options

If you have your own auto insurance policy with comprehensive and collision coverage, then this should also cover you when driving a rental car, up to the limits of your coverage. Remember that any deductibles you have will also apply to rentals. Your personal auto policy may also include certain conditions in relation to rental cars. For example, it may not cover rentals used for business purposes and may limit rental coverage to a maximum period for any one rental, for example, four weeks.

If your existing auto insurance policy does not contain coverage for rental cars, ask your insurer if you can purchase a rider to your policy. A rider to your existing policy may be available for as little as $25 for the duration of your six-month policy (or $50 per year - less than what you would pay for CDW/LDW coverage for a week long rental).

If you don’t have personal auto insurance, consider purchasing a non-owners auto insurance policy. These policies are offered by regular auto insurance companies and may be much cheaper than rental car coverage, especially if you are a frequent renter.

Coverage under most auto insurance policies is in excess of any other coverage. This means that if you do opt to buy coverage from the rental car company, this coverage will kick in first before any claim can be made under your own auto insurance policy.

One important detail you should be aware of is ‘loss of use’ charges. Loss of use is a charge levied by the rental car company to cover its lost income in the event you damage the vehicle and it is required to be taken out of service for repairs. Loss of Use charges could cost you anywhere from $25 to $90 per day, depending on the class of vehicle and rental car company.

The collision damage waiver offered by rental agencies covers loss of use, but in most states your auto insurance policy will not cover this loss. Therefore, if you have an accident, even though your auto insurance will pay for any damage, you may still have to pay this charge yourself. Loss of use is covered by standard auto insurance policies in the following states: Alaska, Connecticut, Louisiana, Minnesota, New York, North Dakota, Rhode Island and Texas. If you do not live in one of these states, you might want to consider paying for the collision damage waiver, although anecdotal evidence suggests that consumers are rarely charged for loss of use, and even if you are, a 10-day repair job would only incur $250 to $900 in loss of use charges. Paying $8 to $19 per day for CDW/LDW just to avoid this potential charge is high.

Some credit card companies provide free CDW/LDW coverage if you charge the cost of the rental car to your credit card. This cardholder benefit is worth serious consideration. Just make sure you read the fine print and any applicable terms and conditions pertaining to the coverage. Some credit card policies don’t allow claims after a specified period, for example, 45 days. Just make sure you file your claim in a timely manner. Some credit card companies limit their insurance to specific vehicles. Check with your credit card company to see if there are any limitations on which type or model of vehicle is covered. These policies may also be revised from time to time so make sure that you are aware of the most current information. Always ask your credit card company for a copy of the insurance coverage details in writing.

Just like the CDW/LDW coverage offered by rental agencies, the coverage provided by credit card companies generally only covers damage to the rental vehicle—not to other vehicles you damaged in an accident. Nor does it cover loss of personal belongings or medical expenses. Therefore, while your credit card coverage may be a substitute for CDW/LDW, it is not a substitute for the other coverages described below.

Also consider your automobile club memberships, which may provide free coverage.

Personal Accident Insurance

Personal Accident Insurance (PAI) provides an accidental death benefit and medical coverage for the renter and any additional passengers riding in the vehicle if it is involved in an accident. For example, the Personal Accident Insurance might provide for a payment of $175,000 in accidental death coverage, up to $2,500 in medical coverage for injuries sustained in an accident, and up to $250 for related ambulance expenses (limits may vary depending on your location and the rental company you use). Personal Accident Insurance typically costs from $1 to $5 per day.

Alternative Coverage Options

The accidental death benefit is equivalent to life insurance, so if you have your own life insurance policy this is unnecessary, unless you want the benefit of additional coverage. If that is the case, you are probably better off amending your life insurance coverage.

Your own auto insurance policy or health insurance policy is likely to provide coverage for medical expenses, so there is probably no need to duplicate your coverage with Personal Accident Insurance.

Personal Effects Coverage or Personal Effects Protection

Personal Effects Coverage (PEC) or Personal Effects Protection (PEP) provides protection against damage, loss or theft of your luggage and personal belongings from the rental car. This coverage generally costs between $1 and $4 per day.

Alternative Coverage Options

Your homeowners or renters insurance may cover your luggage and other personal effects while you travel. Check your policy or talk to your insurance company. If your policy does not include this coverage, ask your insurer if you can purchase a rider adding this protection. Don’t forget that the deductible on your policy will apply to any loss.

Additional Liability Insurance or Supplemental Liability Insurance

Additional Liability Insurance (ALI) or Supplemental Liability Insurance (SLI) protects you and any other authorized drivers from third party claims for property damage, bodily injury or death arising from your use of the rental vehicle. Additional Liability Insurance of $1 million generally costs between $7 and $14 per day.

Alternative Coverage Options

Your existing auto insurance policy may already include liability coverage as will umbrella insurance. Buying an umbrella policy is generally much more cost-effective than purchasing additional liability insurance from the rental company.

Summary of Alternative Coverage Options

Coverage Offered by Rental Agency Potential Alternative Coverage Options
Collision Damage Waiver (CDW) or
Loss Damage Waiver (LDW)
  • Auto Insurance
  • Non-owners Auto Insurance
  • Credit Card Coverage
  • Automobile Club Membership
Personal Accident Insurance (PAI)
  • Life Insurance and Auto Insurance
  • Life Insurance and Health Insurance
Personal Effects Coverage (PEC) or
Personal Effects Protection (PEP)
  • Homeowners Insurance
  • Renters Insurance
Additional Liability Insurance (ALI) or
Supplemental Liability Insurance (SLI)
  • Auto Insurance
  • Umbrella Insurance

Reasons to Purchase Insurance from the Rental Car Agency

Most financial advisors and writers recommend refusing the coverages offered by rental agencies. However, that advice is misguided. There are some good reasons for paying for that extra insurance coverage and it really comes down to your own financial priorities and aversion to risk. There are two questions that need to be addressed:

  1. When you buy rental car insurance, what are you really paying for?
  2. Is rental car insurance giving you good value for your money?

Let’s look at some of the common arguments for buying coverage from a rental car company.

  • You avoid the hassle of having to make a claim from your own insurance company

    Whenever you purchase coverage from a rental car company, that coverage becomes your primary insurance. Your own personal auto insurance or credit card insurance is subordinated to excess-coverage status.

    If you are relying on your own auto insurance and you damage a rental car, it is likely that you will have to pay for the damage upfront and then file a claim to recover the amount from your insurance company. With a CDW/LDW from the rental agency, you can simply walk away and leave them to deal with the damage and cost of repair.

  • You avoid the deductible on your own insurance policy

    The coverage provided by rental agencies generally has no deductible. But if you are relying on your own insurance and you damage the car, or have some of your personal belongings stolen from the vehicle, you will need to cover the cost of your deductible and your insurance company will only cover the balance.

    So what are you really paying for when you buy rental insurance? You are effectively paying for insurance on your deductible! If you are really concerned about your deductible, the problem is not the rental insurance—the problem is your deductible. If you think it is too high, talk to your insurance company and get it lowered. But remember that any reduction will likely result in an increase in premium.

    Is avoiding the deductible a good reason to pay for rental car insurance? No. You would be better off paying a higher premium to get a lower deductible on your own policy. That way you get a lower deductible year-round, not just when you’re renting.

  • You can keep your good standing with your insurance company if you have an accident

    Some commentators recommend you buy coverage from the rental agency in order to protect your current good standing with your own insurance company. If you haven’t had any accidents in the past three years, it is likely that you are paying a lower auto insurance premium than someone who has a history of claims (other things being equal). Buying rental coverage avoids the possibility you will have to make a claim, and then lose your no claims bonus. Any claim is likely to affect your premium for the subsequent three years.

    Your insurance company would never need to know you were in a car crash, and so you would not suffer any penalty.

    So how much of a penalty are you avoiding? Having an accident on your driving record is likely to add about $300 to your premiums each year for three years or $900 in total. If you want to know what it would actually cost you, call your insurance company who should be able to tell you what impact it would have on your rates.

    So, what are you really paying for when you buy coverage from the rental agency? You’re avoiding the possibility of having to pay $900 in additional auto insurance premiums if you are involved in an accident while you are renting.

  • You avoid loss of use charges if you damage the rental car

    Loss of Use charges may be levied to cover the rental company’s lost income while the vehicle is undergoing repairs. Loss of Use charges generally range from $25 to $90 per day. So a 10-day repair job could cost you $250 to $900. Unless you live in Alaska, Connecticut, Louisiana, Minnesota, New York, North Dakota, Rhode Island or Texas, your auto insurance policy probably does not cover Loss of Use.

    So, what are you really paying for when you buy coverage from the rental agency? Nothing if you live in a state where your auto insurance covers this cost. If not, you’re avoiding the possibility of having to pay the rental company up to $900 for lost income.

  • You are likely to be driving an unfamiliar car in an unfamiliar area and therefore more likely to have an accident

    Some commentators say that because you’re probably not familiar with the power and handling of your rental car, and you’re likely to be driving in an unfamiliar area, you are more likely to have an accident.

    In reality, while many people may feel less comfortable driving a different car in a different area, they are probably more likely to take greater care when driving because of this, and therefore be no more likely to have an accident. In reality, it is often actually familiarity that causes us to pay less attention and be more careless. Indeed, traffic accident statistics show that more accidents occur within a few miles of the driver’s home or workplace.

Do Not Void Your Coverage

Be careful not to void your coverage. Most contracts and insurance policies become void if you have an accident while under the influence of alcohol or drugs or you were driving at excessive speed. Many Collision Damage Waivers also exclude coverage for damage caused to the car through negligent driving, driving on unpaved roads, or driving out of the state in which you rented the vehicle. Always read the fine print in your policy so you understand the limitations.

Business Travel

If you are traveling for business purposes, you probably cannot rely on your own personal auto insurance policy for protection unless it specifically includes business coverage. However, many employers have insurance to cover employees during business travel. If not, the insurance offered by the rental car company may be your safest option.

International Travel

If you plan to drive a rental vehicle out of the country, check your insurance limits before you cross the border. Most insurance companies in the United States extend their coverage to Canada and Mexico, but do not generally offer coverage in any other countries. If you plan on renting a car overseas, talk to your travel agent about your insurance obligations and options.

Conclusion

Just because you have your own auto insurance or health insurance policy, do not assume you will be covered when driving a rental car. Check your existing policies and talk to your insurance company to confirm the extent of your coverage.

The key is to plan ahead. You don’t want to be worrying about it when you’re tired after a long flight and feeling pressured by a rental agent. A little bit of advance preparation could save you a lot of money and give you comfort in knowing you are adequately protected.