The proper amount of car insurance is the amount that keeps you legal in your state and also protects you against costs that you could not afford after a serious accident. The minimums are set to ensure that you are legal, but they may not be sufficient to cover the costs of modern medical expenses, car repairs, or lawsuits. A good policy will begin with the necessary coverages and then add higher limits and additional protections depending on your financial situation, car, and usage.
Start with the two things that set your baseline:
Every state has its own minimum insurance requirements, which are usually liability insurance. Liability insurance will pay for the injuries and property damage you cause to other people when you are at fault. In addition to the state minimum requirements, you may also be required to purchase other types of insurance, such as uninsured motorist coverage or personal injury protection (PIP) insurance. Since each state has its own requirements, your first step is to determine what your state requires for minimum insurance coverage.
If you are leasing or financing your car, your lender will require that you purchase collision and comprehensive insurance. Collision insurance will pay for damage to your car after an accident, while comprehensive insurance will pay for damage to your car from other sources, such as theft, vandalism, hail, fire, falling objects, and animals. If you own your car outright, you can choose whether or not to purchase collision and comprehensive insurance based on the value of your car and how much you could afford to lose.
Liability coverage is the most important decision
Liability is the portion of your policy that safeguards your financial well-being in the event that you are responsible for an accident. It usually consists of bodily injury liability (coverage for injuries to other people) and property damage liability (coverage for damage to other people’s property or vehicles). This is the type of coverage that may impact your savings, income, and other assets if you are deemed liable for a serious accident.
The liability limits of many policies are given in the form of three numbers, such as 25/50/25. This is normally interpreted as the following: bodily injury limit per person, bodily injury limit per accident, and property damage limit per accident. The minimum limits of liability can easily be exhausted in the event of an accident that involves multiple injured persons or expensive vehicles, which is why many people purchase higher limits of liability than are required by their state.
A common strategy is to set liability limits that are more in line with actual costs, such as 100/300/100 or greater, particularly if you have significant savings or income that you want to protect. The best liability limit for you will depend on your risk tolerance and exposure, but often raising liability limits is one of the most important improvements you can make.
Why Is My Car Insurance So High?
Uninsured and underinsured motorist coverage often matters more than people expect
Uninsured motorist (UM) and underinsured motorist (UIM) coverage can be used to cover the cost of injuries, and in some states, damage to your car, if you are struck by another driver who either has no insurance or not enough. Some states require UM/UIM coverage, while others make it an optional purchase. When available, it is typically purchased in amounts that equal your liability coverage, as it keeps you covered no matter if you are at fault in the accident or if you are forced into an accident by another driver.
UM/UIM coverage is especially important in areas where there is a higher chance of being struck by an uninsured driver, but it may be a good purchase in any state because even insured drivers may only carry enough insurance to cover minor injuries.
Medical coverage options: PIP and MedPay
Personal injury protection (PIP) coverage is mandatory in some no-fault states and available as an option in other states. This type of coverage pays for medical expenses for you and your passengers, regardless of fault, and may also cover lost wages and services you are unable to perform due to injury. Medical payments coverage (MedPay) is similar in that it pays for medical expenses regardless of fault, but is usually less comprehensive than PIP and does not include wage loss or replacement services.
If your state mandates PIP, you will have options to choose from. If MedPay is an option in your state, many drivers choose a small amount of coverage because it can help pay for immediate out-of-pocket medical expenses following a collision, even if they have medical insurance.
Make Sure You’re Not Overpaying
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Collision and comprehensive: when they are worth keeping
Collision and comprehensive coverage protect your own vehicle, and whether or not to retain these coverages is primarily an economic decision. If you have a loan or lease, you will probably need both. If your vehicle is paid off, you can decide whether or not the cost of the premium is worth it based on the value of your vehicle and your ability to afford to replace it if it was totaled or stolen.
Comprehensive coverage may be worth more than you think for major losses because it will cover more common types of losses, such as windshield damage, theft, and storm claims. Collision coverage may be worth it if you rely on your vehicle and could not afford to replace it without going into debt. If you choose to retain these coverages, the deductible you select will have a large impact on your premium.
Choosing deductibles that make sense
A deductible is the amount that you will have to pay before your insurance company pays for a claim that is related to a collision or comprehensive coverage. The higher the deductible, the lower the premiums, and the lower the deductible, the higher the premiums but the lower the out-of-pocket cost when you make a claim. The best way to make this decision is to find deductibles that you can afford to pay. Selecting a deductible that is high may save you money on premiums but may also make it difficult for you to access the coverage when you need it.
Why minimum coverage is usually not enough
Minimum coverage is intended to satisfy the requirements of the law. It often does not completely shield you against large liability claims, and it does not cover your own car unless you have collision and comprehensive coverage. The problem with minimum limits is that one accident can put you on the hook for a lot of money beyond your coverage limits. Higher limits are less likely to create this problem.
A simple way to pick coverage
First, find out what your state requires and if the lender requires collision and comprehensive coverage. Next, pick a liability limit that will protect your wallet, not just your registration. If you have UM/UIM coverage, consider setting it equal to your liability limits. Collision and comprehensive coverage will depend on your car’s value and your ability to afford replacing it. Lastly, set your deductibles to amounts you can pay.
Now that you have your target coverages, you can compare quotes from different insurers using the same limits and deductibles to make a fair comparison.
