By Bob Plunkett

One of the last great mysteries of the modern world is how to best ensure yourself when renting a car. There are lots of options, but it takes time to determine the right balance of coverage and cost. Car rental companies desperately want you to buy their collision damage waiver (CDW), and will go to great lengths to make you pay for even the smallest damages if you don’t.

Here’s what you need to know.

The CDW lets you Drop the Keys and Forget It. When you buy a CDW, the rental company surrenders its rights to charge you for damage to a car rental with just a few exceptions, such as tire damage. But otherwise, no matter how banged up the car gets, you’re off the hook: Just turn it in and be on your way. No other option – your own insurance, your credit card, or a third-party policy – is as comprehensive or convenient. If you want that full flexibility and peace of mind, you pay for CDW.

But the larger issue is that CDW insurance is ridiculously overpriced. Typically, it starts at around $30 per day and can go higher. It will often cost you more than the rate for renting the car. The cost to the rental company for your coverage is roughly $3 to $4 a day. The rest is pure profit. That’s why the rental agents push it so hard.

The first idea many renters have is to rely on coverage through their existing insurance. In many cases, the auto insurance that covers collision damage to your insured car, also covers damage to a short-term rental. But this coverage is generally limited to driving in the U.S. and maybe Canada, and won’t cover car rentals in Mexico, Europe, or anywhere else. So, before you plan on using your own insurance, you have to thoroughly double-check its coverage. If it does, you can make a claim. BUT: you will have to pay your policy’s deductible, and the claim may have an effect on your car insurance rates.

The second alternative is to rely on your credit card benefits. Today most credit cards provide “free” collision coverage for car rentals, provided you use the card to rent the vehicle. Basic credit card benefits cover: physical damage and/or theft of the rental vehicle; the loss-of-use charges while the vehicle is being repaired; reasonable and customary towing charges. Basic card coverage does not include diminished value of the rental vehicle or administrative costs. A few premium credit cards offer primary collision coverage, meaning the card takes full responsibility for the payment. But coverage on most cards is secondary, meaning the card picks up only what you can’t first recover from your own insurance. Take note: you still have to pay the rental company up front, then file for reimbursement from your card issuer. Worse, many credit cards pay loss-of-use only if verified by the rental company’s log. Some rental companies don’t cooperate with credit-card issuers in providing such logs in a timely manner.

The third option is buying third-party car rental insurance. If you rent a car through one of the big online travel agencies like Expedia or Priceline, the agency normally offers you the option to buy collision coverage for around $10 a day. That coverage is provided by a third-party insurance company such as Allianz. The cost is a lot less than the rental company’s CDW, but, as with credit card coverage, if you damage the car, you have to pay upfront and claim later.

Typical third-party collision coverage is similar to credit card coverage, but because it’s grouped with the booking you won’t have to make any other claims. You can also buy collision coverage independently. One online vendor is Bonzah.com for example, which sells coverage at around $8 per day. And there are others.

You should never get behind the wheel of a car without general liability protection. But you don’t buy that from a car rental company: It usually comes with household, homeowner, or tenant insurance, and it covers far more than a car rental. And if your net worth is in six figures, you probably need an “umbrella” liability policy that covers a million dollars or more. Car rental companies in most countries are required by law to include liability insurance. In the U.S., required coverage can be ludicrously small so if you don’t have substantial liability coverage, you might consider buying the rental company’s offering. Still, your best bet is to make sure you’re covered 24/7 with your own insurance so you can forget about the rental company’s overpriced insurance.

The real lesson here is that no alternative source of collision damage coverage – your auto insurance, your credit card, or a third-party – completely isolates you from risk. Lots of travelers successfully rely on lower-cost alternatives to CDW without encountering any problems, sure. Occasionally, however, your own insurance, credit card, or third-party policy may not cover an unusual charge a rental company might impose.

If you’re unwilling to accept any risk at all, you might want to buy that overpriced CDW. For most travelers and circumstances, credit card or third-party coverage is sufficient and primary coverage is a lot better than secondary.