How Much Car Insurance Do You Need?
This is a serious question, in no small part because there are several factors that determine how much car insurance you need. While drivers often choose a coverage amount (and policy options) based on premium cost, that should never be the primary factor.
Premium cost always matters, but it’s also important to have an adequate level of coverage. If you don’t, your car insurance policy can fail at the worst possible time.
Let’s look at how to determine how much car insurance you need.
Background on Different Types of Coverages and Policy Options
In most states, laws require you to get at least two types of liability insurance to drive legally.
Those include bodily injury liability and property damage liability. But depending on your state of residence, there may be other required coverage types.
In addition, there are other provisions that are not required by state law, but will be required by a lender if you have a loan on your vehicle, or if it’s leased.
Below are descriptions of state and lender required coverage provisions and the reasons why you’ll need them.
Bodily injury liability
This pays medical expenses of those injured in an accident found to be your fault. It will pay up to your policy limits for injuries or death that you or anyone else covered on your policy cause in an at-fault accident.
The terms may vary based on your state laws, but for the most part it will cover up to your limits for medical and funeral expenses, pain and suffering, and legal defense in the case of a lawsuit.
Property damage liability
This is the provision that will cover repairs or replacement of cars or other property caused by an accident that’s your fault. In general, property damage is damage to another car, but it also covers damage to another person’s house, trees, fences, guardrails, poles, and other property.
However, one important exclusion is that it does not cover damage to your car. That will be covered by the next provision.
While the personal property damage portion of a car insurance policy covers the cost of repairs to the other driver’s vehicle when you are determined to be at fault, it will not cover the cost of repairs to your vehicle.
In fact, collision will cover your vehicle regardless of who is at fault.
You can add collision coverage specifically for that purpose. If you have a loan or a lease on your vehicle, it will be required by your lender.
This provision will pay to repair your car if it’s damaged while it’s parked. That includes weather-related damage, vandalism, collisions with animals, and theft.
Comprehensive is almost always paired with collision since both will be required by a lender if you have either a loan or lease on the vehicle.
Guaranteed Auto Protection (GAP)
This is another coverage provision that’s not required by state law but may be required by your lender. If your car has been stolen or totaled in an accident, GAP insurance will cover the difference, or “gap”, between the amount owed on the car and the car’s actual cash value (ACV).
This is an important feature because a typical car insurance policy will cover no more than the actual cash value of the vehicle. If the amount you owe on the car is higher than that value, you’ll need to come out-of-pocket for the difference. It’s typically required on cars with loans greater than 80% of the vehicle’s value.
This provision is required in many states. Despite state laws prohibiting uninsured drivers, the practice continues.
The state of Florida, for example, has the highest number of uninsured motorists at 26.7%. Many more drivers carry only minimum liability coverage, which may be inadequate for the damages you’ll suffer in an accident.
If you’re involved in an accident with either an uninsured or underinsured driver, this provision will cover you. It will generally match the liability limits you choose.
Personal Injury Protection (PIP)
This is a common requirement in states with no-fault car insurance laws. The provision covers medical expenses for you and your passengers after an accident. Each driver files against his or her own insurance company, rather than the other driver's. Some PIP provisions will also cover lost wages and funeral expenses.
In many states, PIP can be waived if you have adequate health insurance.
Discounts to the Rescue
Each of the policy provisions above will be major drivers of the cost of your premium. But there are plenty of discounts available that can lower the cost.
Some of the most common discounts, and the savings you can expect, include the following:
average savings of 26%.
Drivers with accident-free records for three years or five years will receive this discount. Accident-free discounts may be applied in tiers, so you may get a discount for three-years, and then a higher one after five years.
Good driver (safe driver, claims-free) discount
average savings of 27%
A clean record for three to five years will be required by most insurance companies. You will not be allowed to have DUI/DWI convictions, at-fault accidents, and moving violation convictions. Minimum driving experience may be a requirement as well.
average savings of 18%.
This discount can apply to a parent or parents of a full-time student living 100 miles or more from home without a vehicle. Discounts may vary based on distance and your insurer.
average savings of 16%.
Typically applies to full-time students under the age of 25.
Multi-policy home or condo
average savings of 12% to 14%.
You’ll save money on car insurance when you have your home or condo insurance with the same carrier. This discount is commonly referred to as “bundling.”
average savings of 12%. Certain professions will be eligible for this discount, depending on the insurance company. They may give a discount to federal employees, teachers, healthcare practitioners, or other professions shown to have a lower incidence of reckless driving.
average savings of 11%.
The longer you hold your policy with your insurer, the bigger of a discount they’ll offer. Depending on the company, the loyalty discount can apply to between three years and 20 years with the same company.
There are plenty of other discounts available, and you need to request a list of those offered by your insurance company.
How to Determine the Amount of Coverage Needed
A good way to determine how much liability coverage you should have is to look at your net worth.
For example, if your net worth is less than $50,000, you might be able to take the state minimum coverage. If your net worth is between $50,000 and $100,000, you should be looking to choose at least 50/100/50. If it's more than $200,000, choose at least 100/300/100.
Start with the minimum liability coverage required by your state, then go from there. But remember that minimum coverage, while the least expensive, will be adequate if it’s substantially less than your net worth.
Examples of state minimum liability requirements are as follows:
- California: $15,000 for bodily injury liability insurance for one person per accident; $30,000 for two or more people per accident; $5,000 property damage liability insurance.
- Florida: $10,000 for bodily injury liability insurance for one person per accident; $20,000 for two or more people per accident; $10,000 property damage liability insurance; PIP, $10,000.
- Illinois: $25,000 for bodily injury liability insurance for one person per accident; $50,000 for two or more people per accident; $20,000 property damage liability insurance; uninsured motorist bodily injury, $25,000/$50,000.
- Michigan: $50,000 for bodily injury liability insurance for one person per accident; $100,000 for two or more people per accident; $10,000 property damage liability insurance; PIP – six choices starting at $50,000; personal property insurance (PPI), $1 million.
- New York: $25,000 for bodily injury liability insurance for one person per accident; $50,000 for two or more people per accident; $10,000 property damage liability insurance; uninsured motorist bodily injury, $30,000/$60,000; uninsured motorist property damage (UMPD), $25,000.
- Ohio: $25,000 for bodily injury liability insurance for one person per accident; $50,000 for two or more people per accident; $25,000 property damage liability insurance.
- Pennsylvania: $15,000 for bodily injury liability insurance for one person per accident; $30,000 for two or more people per accident; $5,000 property damage liability insurance; PIP, $5,000.
- Texas: $30,000 for bodily injury liability insurance for one person per accident; $60,000 for two or more people per accident; $25,000 property damage liability insurance.
Why Coverage Levels Matter
State minimum car insurance coverage requirements aside, there are important reasons why you may need to take a higher coverage limit.
Below are three popular liability limits, and why you may choose each:
If you drive an older car, have few assets, or don’t drive much, this level of coverage may be perfect for you. It still may not be enough, however, since bodily injury liability coverage must be able to cover medical bills, lawsuits, and loss of income.
This is the most suggested and appropriate level of insurance for most drivers. That includes middle-income earners with a typical level of savings. It will be a little bit more expensive than 50/100/50, but it will provide a much higher level of coverage.
You may not consider yourself rich, however if you own an expensive home or have large savings balances, you may be worth more than you think. This coverage level will be sufficient for most higher net worth individuals.
If you have a net worth of $500,000 or more, you may need this coverage. Umbrella insurance can extend your protection to $1 million or more. It’s surprisingly inexpensive and can be added to your base policy.
What Happens if You Don't Have Enough Coverage?
If policy limits are exceeded after an at-fault accident, you are legally obligated to pay for any remaining damages in most states.
Your insurance company is only liable to pay up to the limits of your policy. The amount of liability insurance coverage you carry should be sufficient to protect your assets, and even a little bit more.
If, for example, you maintain state-mandated minimum coverage, and you’re involved in an at-fault accident with damages of, say, $200,000, the injured party can pursue collection of damages against you that exceed the liability limits in your policy.
When you cannot afford to pay
If you don’t have the liquid assets to pay the excess damages, the victim can take legal action against you.
This can include obtaining a judgment against you, which can extend to putting a lien on your home or even garnishing your wages.
Other situations where you may want to consider having higher liability limits include having teen drivers on your policy, owning a home, owning a large vehicle (SUV or pickup truck), or having multiple drivers on the same policy.
Each can either increase the risk of an accident or expose you to a property lien.
The best strategy is always to shop around and compare prices and benefits between car insurance companies.
Some companies may offer you more protection than others for the same price.
Maintaining sufficient coverage at a reasonable premium – and not pursuing the lowest premium possible – should be your goal.