You might be tempted by low rates in Mexico—rates so low that they might as well be free. (Seriously; we've seen weekly rates in the single digits, especially in resort cities like Cancun, where competition is intense.) But as with everything in life, there's no such thing as a free almuerzo.
Anyone who's lived near the U.S. / Mexico border has probably seen signs advertising car insurance for crossing into Mexico. The differences between insurance requirements in the U.S./Canada and Mexico are sizable.
Similarly to rentals (and insurance in general) in the US, insurance is mostly divided into two camps: collision and liability. While most US-based insurance policies don't extend coverage to Mexico, many credit cards and travel insurance products do provide coverage worldwide—but for collision only. Still, bring along any documentation you have—overzealous rental agencies may try to get you to buy their "CDW" coverage, but as long as you can prove you're covered, you should be able to avoid having to buy it.
However, even with coverage for a vehicle provided by a U.S. or Canada-based company, the required Mexican liability to others is not included. Driving in Mexico is likely going to require a new policy or a specific insurance rider before arriving in Mexico. If you don't acquire coverage beforehand, you may end up purchasing liability from the rental car firms or paying a higher rental rate to go with a company that includes the liability coverage.
How do the quotes in Mexico tend to look? Here's an example from Alamo in Merida, MX.
THIRD PARTY LIABILITY PROTECTION OR TPL IS REQUIRED ON ALL VEHICLES. CUSTOMERS HAVE THE OPTION TO PURCHASE THIRD PARTY LIABILITY OR TPL PROTECTIONS OR SHOW PROOF OF A VALID CURRENT LIABILITY INSURANCE POLICY SPECIFYING COVERAGE IN MEXICO. ADDITIONAL SECURITY DEPOSIT IS REQUIRED IN THE AMOUNT OF 2500.00 USD TO BE HELD ON THEIR CREDIT CARD. TPL PROVIDES YOU WITH THE MINIMUM FINANCIAL RESPONSIBILITY LIMITS AS OUTLINED IN THE APPLICABLE MOTOR VEHICLE FINANCIAL RESPONSIBILITY LAWS OF THE COUNTRY WHERE THE VEHICLE IS OPERATED. TPL PROVIDES LIABILITY COVERAGE UP TO 70,000.00 USD. TPL DOES NOT COVER THE RENTAL VEHICLE, PASSENGER OR MEDICAL EXPENSES. LIABILITY INSURANCE PRODUCTS PURCHASED ON THIRD PARTY WEBSITES ARE NOT ACCEPTABLE FORMS OF COVERAGE. TPL IS 15.00 USD PER DAY.
If you can demonstrate that you have a valid liability policy for Mexico, you may be asked to provide an additional security deposit that's returned at the end of the rental (hefty security deposits exist around the world). If not, the Third-Party Liability plan is a charge of $15 per day. On many rentals in Merida, the per day rate for liability insurance mirrors the weekly rate for the car! However, those who plan and present documentation of the required liability coverage can theoretically leave the counter while paying less than $20 a week for a rental car.
Other companies (like our friends at Payless) might rent you a car with a credit card hold that can be the full value of the vehicle* if the documentation is insufficient and liability coverage is declined.
* A customer should understand that a percentage of that hold is going to disappear, as Payless isn't exempt from Mexican law and there's a class action claiming "deposits" that aren't returned.
It's worth noting that the legal system in Mexico is much less lenient if an accident occurs. If someone's injured and the police haven't figured out who's at fault, the drivers get to go to jail while responsibility is figured out. The driver at fault isn't going to leave Mexico - and might stay in jail - until the injured parties receive an acceptable settlement. And that's if properly insured!
With some of these restrictions and the hassles of procuring car insurance for Mexico, it's often beneficial (and cheaper) for consumers on single trips to find a more expensive rate that includes the legally required liability coverage; Mexican insurance policies acquired abroad tend to become cost effective with frequent use (more than three weeks of every six-month period). Among well-known rental companies, Avis often provides rental quotes with the liability insurance included—but always check terms and conditions when booking. If possible, contact your rental agency before you leave and get documentation in writing of what you need to bring to avoid having to purchase unnecessary insurance: the pen is always mightier than the most persuasive commissioned sales agent.