How Much Car Insurance Do You Need?
This is a serious question, in no small part, because several factors 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 adequate coverage is also essential. 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.
The 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 residence, other coverage types may be required.
In addition, other provisions 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 why you need them.
Bodily injury liability
This pays the 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, they 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 provision will cover repairs or replacement of cars or other property caused by an accident that's your fault.
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 crucial exclusion is that it does not cover damage to your car. The following provision will cover that.
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 car.
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 a lender will require both if you have a loan or lease on the vehicle.
Guaranteed Auto Protection (GAP)
This is another coverage provision 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 vehicle and the car's actual cash value (ACV).
This is essential because a typical car insurance policy will cover no more than the vehicle's actual cash value. If the amount you owe on the car exceeds 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.
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.
This provision will cover you if you're involved in an accident with an uninsured or underinsured driver. 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 their insurance company rather than the other driver's. Some PIP provisions will also cover lost wages and funeral expenses.
PIP can be waived in many states if you have adequate health insurance.
How to Determine the Amount of Coverage Needed
An excellent way to determine how much liability coverage you should have is to look at your net worth.
For example, you can take the state minimum coverage if your net worth is less than $50,000. 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 for 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 for 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 for 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 for 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 for 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 bit more expensive than 50/100/50, but it will provide a much higher level of coverage.
You may not consider yourself wealthy; 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 individuals with higher net worth.
You may need this coverage if you have a net worth of $500,000 or more. 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.
Your liability insurance coverage should be sufficient to protect your assets and even a little 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, extending 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 increase the risk of an accident or expose you to a property lien.
Discounts to the Rescue
Each of the policy provisions above will significantly drive your premium's cost. But there are plenty of discounts available that can lower the price.
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 or five years will receive this discount.
Accident-free discounts may be applied in tiers so that you may get a discount for three years and a higher one after five years.
Good driver (safe driver, claims-free) discount
- average savings of 27
Most insurance companies will require a clean record for three to five years.
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%
Depending on the insurance company, certain professions will be eligible for this discount.
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 between three years and 20 years with the same company.
Plenty of other discounts are available, and you need to request a list of those offered by your insurance company.
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 compensation possible – should be your goal.