How much car insurance do you really need?
Is auto insurance on your adulting to-do list? You may have heard that most states require some auto insurance coverage. The lender of your car loan might require it, too. But how much is enough coverage? It all depends on you.
The minimum amount of insurance you need is based on the laws in the state where you live. The information can be found on state government websites or by calling your local DMV. It’s important to know that there is often a gap between the amount of coverage you're required to have and the amount of coverage you might need to fully protect your assets. Knowing what your auto insurance covers should help you figure out the right amount for you.
Auto insurance coverage is usually made up of several parts, each providing a different type of protection. These types of coverage may be optional or required, depending on your state’s laws.
- Liability coverage: This provides protection from claims made against you, when you caused bodily injury or property damage to someone else with your car.
- Medical payments or personal injury protection: This provides coverage for various medical expenses for you and other people that are needed because of an accident.
- Collision: This provides coverage for losses to your car that were caused by a collision.
- Other-than-collision (also known as comprehensive): This provides coverage for damage to your car that was caused by something other than a collision. Some policies cover damages from fire, theft, vandalism, falling objects, or other events.
- Uninsured motorist (UM): This provides coverage when you or others are injured by an uninsured or unidentified hit-and-run motorist.
- Underinsured motorist (UIM): This provides coverage when you or others are injured by an underinsured driver.
Of course you’ll need to meet your state’s requirements for coverage, and possibly your lender’s, too. But beyond that, deciding how much to buy is a balancing act. Weigh how much coverage you need against what you can afford. Think about your ability to withstand a lawsuit, and decide what assets you need to protect.
If you injured or killed someone in an accident, bodily injury claims for medical bills, lost income, and pain and suffering could amount to hundreds of thousands of dollars. Property damage claims can also be expensive. For example, imagine you caused severe damage to someone else's brand-new luxury car, or if you struck and damaged a telephone pole. Would you be covered for the damages you caused?
In some states, the required minimum liability coverage might not fully cover the costs of a serious accident. That means you could have to pay part of the claim out of your own pocket if you're sued. This could be dangerous if you own a house or have other large assets to protect. You might want to have bodily injury and property damage liability coverages well beyond what your state or lender requires, but keep in mind that you shouldn't buy more insurance than you can afford.
Medical payments coverage
If you have good health insurance coverage, you might think that medical payments coverage is unnecessary. However, your health insurance may not cover anyone other than you and your family. Medical payments coverage in auto insurance, however, will often cover anyone who is a passenger in your car, whether they are family members or not.
If your state requires medical payments coverage, the minimum requirement might be enough. You can sometimes purchase additional coverage for only a small increase in your premium. And even if this coverage is optional in your state, you might want to consider buying some.
Collision and other-than-collision coverage
In most states, both collision and other-than-collision coverage are optional. If you are still paying off a car loan, the lender might require you to carry both. But if you don't have either of these types of coverage and your car is stolen or damaged, you may have to pay for the vehicle's repair or replacement out of your own pocket (unless the accident was caused by another driver and you can prove it).
Collision coverage and other-than-collision coverage usually have deductibles (payments that you make out-of-pocket before your insurance kicks in). And they generally only provide coverage up to the actual cash value of your vehicle. Having these kinds of coverage on older, less valuable cars might not be worth the cost—any payment you’d receive would be small and might not be more than what you’d pay in premiums and deductibles. Find the current value of your car at consumerreports.org to help you decide if this type of coverage is something you want, if it’s optional for you.
Uninsured motorist and underinsured motorist coverage
Even if uninsured motorist and underinsured motorist coverage is optional in your state, you might want to purchase some. Otherwise, if you’re injured or have other losses from a driver who doesn't have enough auto insurance—or has no auto insurance at all—you may not receive any additional funds to help cover your losses.