Car insurance in Portugal

Some credit cards come with basic CDW and there are third party vendors such as Allianz that offer basic CDW.

With the rental company there’s basic CDW, an enhanced CDW with a lesser deductible, and full coverage, zero deductible. Then there are optional coverages (they vary by company) like tire protection and roadside assistance, personal injury protection, windshield protection, etc.

Liability insurance is compulsory and is included in the rental car price. Which is best for you depends on your comfort level and budget.

First off, this has very little to do with Portugal specifically. This dilemma exists more or less
wherever you rent a car.

I will add to what jaimeelsabio has written to note:

• you always get liability coverage when you rent a car in most European countries. This protects you from any issues caused to people/animals and property apart from you and the car.
• the CDW and associated coverages that protect you from damage to the car can either come from the rental car company directly, a 3rd party associated with the rental car company, or yourself, most likely through the credit card you use to rent the car. You can pay more for increased (less deductible) or more comprehensive (for instance, wind and sand damage is an additional item in Iceland since these are higher frequency issues) coverage.
• there is a "zero-deductible" option in many cases now that costs more but basically absolves you for having to pay anything out of pocket if the car is damaged in any way.

If you opt to use your credit card's coverage, you need to be aware of whether the coverage is
primary or secondary. If secondary, then your primary insurance (which could be your home
policy, but, many US auto insurance policies are not valid in Europe) kicks in first.

No matter what, you should examine the car closely when you get it, take pictures and video,
and review the list of pre-existing issues that comes with the car to make sure it includes
everything you see before you drive off the lot.

I just got back from a great 2 week trip. We picked up a car at Sixt in the Lisbon airport on June 3 (day of the general strike), and I elected to buy full insurance even though it's not mandatory and I could have used my CC insurance. I heard enough stories about people getting hit with surprise charges for scratches, etc., and I didn't want to have to worry about babying the car. Turned out to be a good decision as we got a huge BMW wagon with very low clearance in the front end, and I did a pretty good number on it parking at one of our hotels. They didn't care at all and gave us a "no new damage" report within a few minutes of dropoff. FWIW, pickup and dropoff were very fast and seamless. I had stressed quite a bit about the whole the process and it turned out fine.

American Express has an option to book for rental car insurance that is cheaper than the car rental company.

I’ve done that drive and yeah, the insurance part is confusing at first!

Basically, the rental already includes basic coverage for damage to others, but not really for your own car. Most bookings also include CDW, but with a high excess, so if something happens you could still be on the hook for a good amount.

What matters in practice is how much risk you’re comfortable with. If you don’t want to think about scratches, tight roads, parking, etc. (especially in the Douro), it’s worth getting the full coverage / zero excess option, it just makes the whole trip more relaxed.

You can skip it if you’re relying on credit card coverage, but then you’ll have a big deposit and a bit more hassle if anything happens.
Honestly, for a trip like that, most people just pay a bit extra and go for full coverage so they don’t have to think about it. Or you can just do a tour with no cars!