Why rental car insurance is usually a rip-off

If you've ever rented a car, you've probably been pressured to buy insurance. A salesperson will inevitably urge you to pay a little extra for what seems like lot of protection. He or she might keep offering you alternative plans if you decline — and as you stand there, uncertain of your coverage and fearful of calamity, it might feel like the prudent, adult move to simply say yes.

It isn't.

What the salesperson doesn't tell you is that most drivers won't actually benefit much from their insurance. In some instances, buying it from the rental company will even nullify certain types of existing coverage, leaving you with no more protection than if you'd opted out in the first place.

Insurance is a very profitable add-on, and these agents sell it on commission — but in most cases, you probably don't need to get it.

Don't get either type of insurance if you have your own car

(Shutterstock)

To figure out what to get, it's helpful to distinguish between the two main types of insurance rental companies will try to sell you:

• Loss damage waiver (LDW), which covers any damage you might cause to the vehicle and usually costs $10 to $20 per day
• Liability insurance, which covers damage to other people and cars you cause with the vehicle and generally costs $5 to $15 per day

If you have your own car — and thus your own insurance plan — you probably have both of these forms of protection already. They're built into most plans, the vast majority of which extend to cover rental cars.

Of course, there are some exceptions. A slim minority of people just have the legally mandated liability insurance but not the optional collision or comprehensive insurance (which is analogous to the LDW). Or you might have a collision plan with a very high deductible (meaning you have to pay a lot of money toward a repair before the insurance company starts pitching in). If either of these are the case, you might want to consider adding some insurance from the rental agency.

But the bottom line is that if you have your own car, take a good look at your own insurance plan before you get to the rental counter. It'll probably cover you just as well as what they'll try to sell you.

Most credit cards give you some coverage

(Shutterstock)

Even if you don't have a car, most credit card companies automatically offer collision insurance for vehicles rented with their cards. This is roughly analogous to the LDW discussed above.

But this is usually "secondary" insurance, which means it's only good if there are otherwise gaps in coverage. In other words, this insurance only kicks in if you don't buy an LDW from the rental car agency.

All this can vary from card to card — so look closely at the fine print of your credit card agreement (or call the company) to see if you're covered. But in general, the following cards offer secondary collision insurance for rental cars:

• All Visa cards
• All American Express cards
• Platinum, Gold, World, and World Elite MasterCards
• Some Discover cards

Again, there are some exceptions, and you have to be careful. Most of these cards only cover rentals made in the US, and they might only cover cars rented for two weeks or less.

If you don't own a car, you probably want liability insurance

Most credit cards, however, don't offer any sort of liability insurance (the kind that covers damage to other people and cars). Rental companies are legally obligated to provide a minimum baseline level of liability coverage for no extra fee, but it's very low — only covering up to $50,000 or so in damages in most states.

In essence, this means that if you cause a serious accident that leads to other drivers' and passengers' medical bills greater than this amount, you'll have to pay the remainder. And that remainder could theoretically be astronomically huge.

So if you don't own a car — and thus don't have your own liability plan — opting to pay for the rental agencies' extra liability coverage is a very good idea. Alternatively, you can buy a non-driver liability coverage plan from Geico, Progressive, and a few other companies if you frequently rent or borrow cars.

There are two other types of insurance — and you probably don't need them, either

Rental agencies also offer two other, cheaper types of insurance:

• Personal accident insurance, which covers your medical costs in the event of an accident and usually costs less than $5 per day
• Personal effects protection, which covers the theft of any of your possessions you might have in the vehicle and usually costs less than $5 per day

Both of these are usually much cheaper than the first two types of insurance offered, but for most people they're not necessary.

If you have health insurance — which has been legally required of almost all US citizens since 2014 — you likely have coverage of your own medical costs that's just as substantial as what the rental car company is trying to sell you, if not more so.

If you have homeowners or renters insurance, meanwhile, your possessions will typically be covered from theft whether they're at home or on the road with you. If you don't have either of these types of insurance and are traveling with especially expensive items, however, then this insurance might be worthwhile.

Why rental agents push so hard for you to buy insurance

(Joe Raedle/Getty Images)

There's one basic reason, even though the majority of renters don't need it: Insurance is a high-margin item.

Like prepaid gas, luxury vehicles, GPS navigators, and other sorts of upsells, insurance is responsible for a disproportionate amount of the rental agency's profits. The insurance policies cost rental companies little, and the added daily fees can substantially increase your bill. On the other hand, if you decline insurance (and rent a compact car and pump your own gas before returning), their costs aren't a whole lot lower, but your bill is reduced dramatically.

As an anonymous Los Angeles rental car agent wrote in a "confession" for the auto website Edmunds.com:

Selling products above and beyond the car was essential for survival in the business. If someone walks out with a killer deal, takes the cheapest car, takes no "protection," which is their term for insurance, takes none of the other products we offer — it reflects poorly on me and ruins my likelihood of promotion.

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