How Much Car Insurance Do You Need?

How Much Car Insurance Do You Need?
How Much Car Insurance Do You Need?

Determining the right amount of car insurance coverage for you can depend on various factors, including your location, the value of your car, and the assets you want to protect.

Here are some key takeaways to keep in mind:

  • Most states require you to have at least the minimum amount of insurance coverage for any injuries or property damage you cause in an accident.
  • Optional collision coverage can help cover the cost of repairing or replacing your own car if you're in an accident.
  • Comprehensive coverage, which is also optional, can protect you against other risks like theft or fire.
  • In some states, uninsured motorist coverage is mandatory and can protect you if you're hit by a driver who doesn't have insurance.

How Car Insurance Works

Car insurance is not a single type of coverage, but rather a package of several different types of insurance. The most common ones include bodily injury liability, property damage liability, medical payments or personal injury protection, collision coverage, comprehensive coverage, and uninsured/underinsured motorist coverage.

While some of these coverages are mandatory in certain states, others are optional. Additionally, if you have an auto loan or lease, your lender may also require certain types of coverage. However, it's up to you to decide how much coverage you need to protect yourself and your assets.

Factors that may influence your decision include where you live, the value of your car, and the level of risk you're comfortable with. By understanding each type of coverage and what it offers, you can make an informed decision about how much car insurance to purchase.

Bodily Injury Liability Coverage

Bodily Injury Liability Coverage: Bodily injury liability coverage is an essential part of your car insurance policy that covers the cost of injuries you or your family members listed on the policy may cause to someone else in a car accident. This coverage includes medical expenses, lost wages, and pain and suffering for the injured party.

How much you need: The required minimum amount of bodily injury liability coverage varies from state to state. On an auto insurance policy, the coverage is typically expressed as three numbers, such as 25/50/20. The first number represents the maximum your insurer will pay per person if you injure someone in an accident, while the second number is the maximum it will pay per accident if more than one person is injured. The third number represents the maximum amount the policy will pay for property damage.

In most states, the minimum amount of bodily injury coverage you're required to have is $25,000 per person and $50,000 per accident, although some states have different requirements. While this may be enough for some drivers, it might not be sufficient if you're involved in a serious accident that results in significant injuries or property damage.

To determine how much bodily injury liability coverage you need, you should consider your assets and whether they would be at risk in the event of a lawsuit. If you own a home or have a substantial amount of savings, a costly accident could put those assets in jeopardy. In that case, you may want to purchase additional coverage beyond the state minimum.

The nonprofit Consumers' Checkbook recommends a minimum of 100/300/50 coverage. This means your insurer will pay up to $100,000 per person, $300,000 per accident, and up to $50,000 for property damage in the event of a covered accident. The cost difference between this level of coverage and the state minimum is usually minimal, and the additional protection it provides can be well worth it in the event of a serious accident.

If you have significant assets to protect, you may want to consider purchasing even more coverage than the recommended 100/300/50. For example, coverage of 250/500/100 could be more appropriate. Additionally, you may also choose to purchase an umbrella policy that provides additional liability coverage for both your auto and home insurance, often up to $1 million or more. An umbrella policy can provide an extra layer of protection and peace of mind in case of a serious accident.

Property Damage Liability

What it covers: Property damage liability is a component of car insurance that covers the cost of damage caused to someone else's property, such as their vehicle, fence, or tree, in the event of an accident.

How much you need: Like bodily injury liability, most states require drivers to carry a minimum amount of property damage liability coverage. This is typically represented by the third number in your policy's liability coverage sequence, such as 25/50/20, which would provide $20,000 in coverage for property damage. While some states may require as little as $5,000 or $10,000 in coverage, $20,000 or $25,000 minimums are more common.

It's worth considering purchasing more property damage liability coverage, especially if you have significant assets to protect. However, unless you're involved in an accident with an expensive vehicle, the financial risk of property damage is typically lower than bodily injury. A commonly recommended level of property damage coverage is $50,000, or more if you have substantial assets to protect.

Medical Payments (MedPay) or Personal Injury Protection (PIP)

What it covers: Medical payments (MedPay) or personal injury protection (PIP) is a type of car insurance that covers medical expenses for you and your passengers in the event of an accident. This type of coverage can also include coverage for lost wages resulting from injuries sustained in an accident.

How much you need: The requirements for MedPay or PIP coverage will vary depending on your state. Some states may require it, while others may not offer it at all. For example, in no-fault states like Florida and New York, PIP coverage is mandatory. In Florida, the minimum coverage amount is $10,000, while in New York, it's $50,000.

If you already have good health insurance, you may not need more than the required minimum of PIP coverage. However, if you don't have health insurance, it may be a good idea to purchase more coverage. This is particularly important in states like Florida, where the minimum coverage amount may not be enough to cover the cost of serious injuries.

Collision Coverage

What it covers: Collision coverage pays for repairs or replacement of your car if you're in an accident with another vehicle or object, regardless of who's at fault.

How much you need: Collision coverage is not required by any state, but if you're leasing a car or have an auto loan, your lender will likely require it. Even if you don't have a loan, you may still want to consider collision coverage, especially if your car is worth a significant amount.

When deciding how much collision coverage you need, consider the value of your car, the cost of repairs, and your deductible. Collision coverage comes with a deductible of $250 to $1,000, meaning you'll pay that amount out of pocket before the insurer covers the rest. If the cost of repairs or replacement exceeds the value of your car, collision coverage may not be worth the cost.

Ultimately, the decision to purchase collision coverage depends on your financial situation and risk tolerance. If you can afford to pay for repairs or replacement out of pocket, you may choose to forego collision coverage. However, if you can't afford to pay for those costs, collision coverage could provide peace of mind and financial protection.

As your car gets older, the value of collision coverage may decrease. When your car is no longer worth much, it may make sense to drop collision coverage. This is because the cost of your annual premiums plus the deductible you'd have to pay after an accident could end up being more than the value of the car. In fact, many insurance companies recommend dropping collision coverage when your car is worth less than a few thousand dollars. By doing so, you can save money on your premiums while still having coverage for other important risks.

Comprehensive Coverage

What it covers: Comprehensive coverage protects your car against damage caused by non-collision events such as natural disasters, theft, or vandalism. This type of insurance can be essential in helping to pay for the repair or replacement costs of your car in the event of damage or loss.

How much you need: Although comprehensive coverage is optional, your lender may require it if you have an auto loan or lease. If you own your car outright, you may choose to drop this coverage. However, if you live in an area prone to natural disasters, car theft, or vandalism, you may want to consider keeping comprehensive coverage.

To decide whether comprehensive coverage is right for you, you should assess the value of your car and your ability to pay for repairs or a replacement if it is damaged or stolen. You should also consider the cost of premiums for the coverage and the likelihood of non-collision events in your area.

Uninsured/Underinsured Motorist Coverage

What it covers: Even though state laws require drivers to have liability coverage, many drivers on the road are either uninsured or underinsured. In fact, as of 2019, around 12.6% of drivers, or one in eight, were uninsured. This is where uninsured/underinsured motorist coverage comes in. It can protect you and your family members in case you're involved in an accident with an uninsured, underinsured, or hit-and-run driver. The coverage will help pay for any injuries sustained or damages to your vehicle.

How much you need: The amount of uninsured/underinsured motorist coverage you need will depend on your state's requirements. Some states require drivers to carry uninsured motorist coverage (UM), while others require underinsured motorist coverage (UIM).

For example, Maryland requires drivers to have at least $30,000 per person and $60,000 per accident in uninsured/underinsured motorist bodily injury liability insurance. It also requires at least $15,000 in uninsured motorist property damage coverage. It's always a good idea to review your policy to make sure you have the right amount of coverage to protect you and your family.

While some states require uninsured/underinsured motorist coverage, it's optional in others. Even if it's not required in your state, you may still want to consider adding this coverage if your existing policy wouldn't be enough to cover the costs of a serious accident. For instance, if you don't have sufficient health insurance or medical coverage through your car insurance policy, uninsured/underinsured motorist coverage can help fill the gap.

If you do live in a state where uninsured/underinsured motorist coverage is mandatory, you can opt to purchase more than the minimum required amount. Conversely, in states where it's not required, you can still choose to add it to your policy for extra protection.

Other Types of Coverage

When shopping for car insurance, you may come across optional types of coverage such as roadside assistance, rental reimbursement, and gap insurance. Roadside assistance typically covers towing services, while rental reimbursement can cover the cost of a rental car if yours is being repaired. Gap insurance covers the difference between your car's actual cash value and what you still owe on a lease or loan if it's declared a total loss.

Deciding whether you need any of these types of coverage depends on your personal circumstances, such as whether you already have access to roadside assistance through an auto club, and your ability to pay out of pocket for these services in case of an emergency. Consider your budget, potential risks, and any other resources you have before deciding whether to add these optional coverages to your policy.

The Bottom Line

When choosing an auto insurance policy, you'll have to decide which types of coverage to include. Some types of coverage are required by your state or your auto lender, while others are optional. Deciding on the right amount of coverage to buy will depend on the assets you need to protect and how much you can afford to pay.

To find out what coverage is required in your state and for further advice, visit your state's motor vehicle department website. You can also consult with an independent insurance agent who is familiar with the laws in your state and can provide policy options from a range of insurance companies.

It's important to carefully consider your options and choose a policy that provides adequate protection for your needs, including considering optional coverage like roadside assistance, rental reimbursement, and gap insurance.

DISCLAIMER: The information provided in this article is for educational and informational purposes only and should not be taken as professional or legal advice. Auto insurance laws and regulations vary by state and are subject to change. It is important to consult with a licensed insurance agent or attorney for advice on specific coverage needs and requirements in your area. The accuracy and completeness of the information provided in this article is not guaranteed and may be subject to errors or omissions. The author and publisher disclaim any liability for any loss or damage resulting from reliance on the information provided in this article.