For many people, the best auto insurance policy provides the greatest amount of coverage at the lowest cost. Because auto insurance has become commoditized, the focus often shifts to the premium amount as the primary point of comparison, which is fine as long as you don't lose sight of what it is you are trying to protect. Paying a $1,000 deductible for a dented bumper, while inconvenient, is not a game changer for many people; but a liability claim of $500,000 or $1 million can be a life-changer. Auto insurance coverage should provide the maximum amount of protection against that which poses the greatest possible risk. To determine how much car insurance you actually need, consider several types of insurance coverage.
Start with Mandatory Liability Coverage
Auto liability coverage is mandatory in every state except New Hampshire. Liability coverage includes bodily injury coverage, which covers injuries to others and property damage coverage, which covers the cost of damage to other people's vehicles or property. You are responsible for any liability claims resulting from accidents when you are at fault.
Each state sets a minimum coverage requirement, usually stated as a three-part number, such as 100/300/50. Each number represents a coverage amount in thousands of dollars. The first number is the coverage amount for bodily injury for a single person, while the second number is the total coverage amount for all individuals injured in the accident. The third number is the coverage amount for property damage. The state minimums for bodily injury coverage are as low as $20,000 to $25,000, and $40,000 to $50,000 for total coverage per accident. Property damage minimums range from $5,000 to $25,000.
How much liability coverage you need should be based on what you need to protect. If you have assets, such as a home, savings, investments or other property, you risk losing them if you don't have enough liability coverage. Considering that many jury-awarded claims exceed $500,000 (including medical costs and pain and suffering), your risk exposure would be extremely high if you only carry the minimum coverage. Since liability claims can potentially do the greatest financial harm, it is recommended that you carry enough coverage to protect your assets.
As for other mandatory coverages, some states have requirements for uninsured or underinsured motorist protection and personal injury protection. Check with your state insurance department for any other mandated coverage.
The Rest Is up to You
There are several other components to your auto insurance policy, but the decision as to whether you need the coverage or how much coverage you should have is up to you. For instance, unless you have a loan out on your car, you are not required to buy collision or comprehensive coverage. Other factors to consider in determining your car insurance needs include:
• Your age and driving record
• The age, make and model of the car
• Your ability to self-insure
The additional coverages you need to consider are collision, comprehensive, personal injury or medical insurance, and uninsured/underinsured coverage.
Collision covers the cost of repairing or replacing your car. Some auto lenders require this as part of your minimum coverage. If your car is worth more than what you could pay to replace it, it would be important to have collision coverage. If your car is more than a few years old and the loan is paid off, you could opt out of this coverage.
Comprehensive coverage is the cost of replacing your car or its contents for just about any other event besides an accident. Such events include car theft, weather damage or fire damage. If your car is more than a few years old, you may not need this add-on.
Personal injury or medical payments covers expenses related to medical and funeral expenses for you or others injured or killed while riding in your car. With the exception of the funeral coverage, medical payments coverage may be redundant coverage if you have sufficient health care coverage.
Some states combine the two, while others make you choose one or both. This is especially important if you live in certain regions of the country with high percentages of uninsured or underinsured motorists. If you or your family members have an accident with an uninsured or underinsured motorist while in your car or on foot, you will be covered for all costs related to the accident.
The deductible is the amount of an insurance claim you agree to pay out of your pocket before the insurance company pays the remainder of the claim. The deductible represents the amount of financial risk you are willing to assume. If you are willing to assume more financial risk in the form of a higher deductible, your premium cost is lower.
It might seem like the smart thing to do to take the lowest deductible, typically $500, because that would mean less money out of your pocket if you need to file a claim. However, if you never have to file a claim, that low deductible will have cost you hundreds or thousands of dollars in higher premium costs over time. If you take the highest possible deductible, typically around $1,500, you could save on your premium costs, letting you put more money into an emergency fund that can be available when and if you need it for repairs. For some people, this can be a much better use of their funds.