How Much Car Insurance Do I Need?
Auto insurance coverages can be confusing. Just what does each part of your policy cover? Read on for the answers, plus the right amount of coverage you need to protect yourself.
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How Much Auto Insurance Coverage Is Enough?
When it comes to auto insurance, there's no one size fits all answer. But you can calculate the right amount of coverage based on your situation.
Start by adding up the value of all your assets, including:
- Your vehicles
- Your home
- Other property you own
- The amount in your savings accounts
- The amount in your retirement and investment accounts;
- Any valuables, antiques and collectibles, such as jewelry, fur coats, artwork, coins, stamps, etc.
Compare the dollar amount of all your assets to your state's minimum auto insurance requirements.
If your assets are worth less, buy auto insurance that equals the state's minimum coverage requirements.
If your assets are worth more, take out an equal amount of auto insurance coverage. That means either:
- Buying comprehensive and collision coverage that is equal to the actual value of your vehicles.
- Buying liability coverage that equals the total value of all your assets.
Remember, it's always better to be overinsured than underinsured. You want enough insurance to protect your assets in case someone sues you after an auto accident.
What Is Recommended for Car Insurance Coverage?
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If your state mandates certain auto insurance coverage limits, you must purchase at least this amount. However, you can (and probably should) buy more.
Your auto policy is broken into several categories, each with a specific focus. We break down each below.
Liability
Bodily injury and property damage insurance pay for someone else's injuries and damages for which you are responsible. Many states have a minimum limit on the coverage you purchase.
These are always given in split limits: bodily injury per person, bodily injury per accident, and property damage per accident. The most common example is 25/50/25.
That means means your coverage limit is:
- $25,000 per person
- $50,000 per accident
- $25,000 for property damage.
Are State Minimum Limits Enough Coverage?
The answer is no. When you cause a car accident, you face damages, lawsuits, medical costs, and more. If the costs of the other person's injuries are greater $25,000, you will be legally responsible for paying the remaining bills out of pocket.
If you don't have that money, then the courts will likely take any assets you have to cover it. These may include your:
- House
- Car
- Savings accounts
- Retirement account
- Income paycheck
To avoid this troubling scenario, choose the amount of coverage sufficient to protect the total value of your assets.
There's no magic number but here's a good rule of thumb: You need to buy enough bodily injury coverage to protect your assets.
That mean paying a little more in premiums for added protection. But consider the alternative. Without sufficient coverage you might:
- Lose your assets
- Have your current and future wages garnished
- Pay a huge sum out of pocket
Amounts of Liability Coverage
Most companies offer the following split limit coverage amounts:
| Per Person | Per Incident | Property |
|---|---|---|
| $25,000 | $50,000 | $25,000 |
| $50,000 | $100,000 | $50,000 |
| $100,000 | $300,000 | $50,000 |
| $100,000 | $300,000 | $100,000 |
| $250,000 | $500,000 | $100,000 |
| $500,000 | $500,000 | $100,000 |
| $1,000,000 | $1,000,000 | $100,000 |
The difference in premium varies significantly between these coverage ranges. They'll also depend on other factors including your location, age, driving history, vehicle type, and credit score.
This extra liability coverage can be added to any personal insurance policy you have, including your homeowners, renters, boat, motorcycle, and RV insurance.
For example, if you have 250/500 on your auto insurance, a $1 million umbrella policy will increase the total liability coverage to $1,250,000. Umbrella coverage ranges from $1–$5 million, and premiums usually start at around $150.00/year.
Uninsured/Underinsured Motorist
UI/UIM coverage provides money to cover you in a not-at-fault accident if the other driver has no insurance (or insufficient coverage).
This happens often in cases where you need to use the other party's bodily injury coverage, but they only carry the state minimum liability limits.
Choose high enough UI/UIM coverage to cover:
- Medical expenses
- Compensatory damages
- Loss of future income in the event of disability
If you want to increase your UI/UIM coverage, you will need to increase your liability coverage as well.
Personal Injury Protection
Most states require Personal Injury Protection. It covers injuries of the insured regardless of who was at fault in an accident. This coverage typically applies instead of health insurance if the injuries were sustained as a result of a car accident.
Benefits include:
- Ambulance fees
- Hospitalization
- Medical supplies
- Rehabilitation services
- Medication
- Nursing care
- Income loss
- Childcare and household expenses
Minimum requirements are typically $50,000 in coverage. However, most insurance companies allow you to purchase additional PIP coverage up to $125,000.
Medical Payments
Medical payments cover you and the occupants of your car, no matter who was at-fault for the accident. In some states, such as New York, it will cover anything above your PIP coverage.
While medical payments is not a mandatory coverage in every state, it is an important coverage to have.
Benefits include:
- Health insurance deductible reimbursement
- Ambulance fees
- Hospital stays
- X-rays
- Surgical procedures
- Doctor visits
Coverage amounts available vary by insurance company. Some insurance companies, such as Allstate and State Farm, offer coverages as high as $100,000.
The difference in price between coverage options varies depending on the insurance company you have, but can typically range from $3.00–$40.00 per 6 month term.
Full Coverage
Full coverage includes both collision and comprehensive. These offer protection against different types of incidents.
- Collision coverage pays for damage as a result of colliding with another object, including another car, house, city property, and trees.
- Comprehensive coverage pays for anything other than a collision, such as fire, storm, theft, and vandalism.
Both coverages, which can be purchased separately, have a deductible that can range from $250.00–$2,000.00. Keep reading to see if full coverage is right for you.
When to Carry Full Coverage
Full coverage may be worth the expense in some cases if you:
- Drive a Leased or Financed Vehicle
Leasing and financing companies required full coverage, with a maximum deductible of $1,000.00. - Have Vehicles Worth Over $5,000
Consider how much the insurance company will have to pay after you pay your deductible. If you cannot afford to pay the rest out of pocket, you should purchase full coverage. - Are a High-Risk Driver
Drivers with multiple accidents and/or traffic violations are at a greater risk of getting into an accident. Therefore, it is worth purchasing full coverage to ensure that your vehicle is covered.
Don't carry collision and comprehensive insurance coverage if the cost is more than 10% of your car's replacement value. This is called the 10% rule.
Say your car is worth $3,500 and your deductible is $1,000. The most your insurance company will pay out is $2,500 if your car gets totalled.
If you're paying more than $250 (10% of $2,500) for full coverage, it's probably time to drop comprehensive and collision and stick with liability coverage.
Optional Coverages
Most companies offer additional coverages. What do they cover and are they worth the cost? Find out below.
Roadside Assistance
This coverage provides on-site repair, servicing, and towing services free of charge (with some limitations).
This coverage is only available to vehicles that have full coverage. If you think you might need Roadside Assistance coverage, you can expect to pay anywhere from $8 to $30 per vehicle.
- Towing
- Jump-start
- Car unlocking
Rental Car Reimbursement
This coverage provides a daily dollar amount and a maximum limit to rent a car if your vehicle needs to be fixed after an accident or is totaled from a covered loss.
The amounts available usually range from $20–$50/day, with a maximum payout of between $600 and $1,500.
Consider this coverage if you won't have access to another car in the event of an accident. However, if you have other cars in your household or know of a friend or family member are willing to let you borrow theirs, then this coverage probably isn't necessary.
Ridesharing
While ridesharing companies provide their own insurance, it only picks up once you actually have a customer inside your vehicle. Your personal insurance will stop providing coverage once you've accepted a customer for a fee.
The Ridesharing endorsement will provide coverage between the moment you've accepted a customer and the moment that you pick them up. Without it, you likely don't have any coverage in that period of time.
GAP Insurance
If you finance a new car, it may lose its value faster than the loan will be reduced. If you have a total loss and don't have GAP coverage, then the insurance company will likely pay less for the car than what you still owe on the loan.
GAP coverage solves this problem by covering the amount owed on the loan. Some financing companies will require you to have this coverage.
This is a good option if you have a car loan, even if it is not required. However, many insurance companies will only allow this on newer vehicles (less than 5 years old).
Customized Audio Equipment
Regular auto insurance policies only cover factory-installed parts. Some insurance companies may include a limit for customized parts and equipment, but this amount is typically no higher than $3,000.
Simply put, if you have any type of customization on your car, you need to make sure you buy this extra coverage.
Bottom Line
To determine how much insurance you need, you'll need to consider your financial assets as well as your driving habits. Make sure to choose a coverage amount that will protect your financial assets and future earnings.
Write to Andrew Flueckiger at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.
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