How much car insurance do you need? The answer to that question is complicated by a number of variables, including the year and make of your car, whether it's new or used, where you live, your driving record, the state of your finances, and more. But let's start by looking at the car itself and its value to you as the owner.

Key Takeaways

  • Buying car insurance is a way to protect your investment.
  • States have minimum insurance requirements, with liability the only insurance type that is required almost across the board.
  • Collision coverage may help defray car repair costs after an accident, but it may not be worth the cost if the value of your auto is too low.
  • Comprehensive insurance protects your vehicle in case of theft, fire, natural disasters, or other unexpected problems—anything but a collision.
  • Uninsured motorist coverage is worth considering because many people in the U.S. drive without insurance.

The Cost of Owning a Car

Buying and owning a car is a significant investment. In January 2020 the average price for a new car was $37,851, according to Kelly Blue Book. Plus, it costs approximately $813 per month—the second-largest monthly expenditure for most Americans, says Quicken Loans—to keep it on the road. That includes car insurance, for which people lay out about $120 a month, on average.

A car is not a good investment by Wall Street standards. Unlike real estate, vehicles rarely appreciate. The moment you drive off the lot, a vehicle starts depreciating at an alarming rate. According to Carfax, your car's value typically decreases 20% by the end of the first year of ownership. For the next four years after that, you can expect the vehicle to lose roughly 10% of its value annually. In five years, you will have lost at least 60% of your initial investment.

But most Americans need a car. According to Gallup, nearly all U.S. adults regularly drive a car or other vehicle, with 83% reporting they must do so at least several times a week. Sixty-four percent say they drive every day.

Consequently, we are constantly putting our investment at risk—both physical and fiscal. There were more than 6.7 million car accidents in the U.S. during 2018. That's more than 18,400 a day, or 13 every minute. The Centers for Disease Control and Prevention says motor vehicle crashes are a leading cause of death in the U.S., with more than 100 people dying every day. The economic impact—the cost of medical care and productivity losses associated with traffic accidents—exceeded $75 billion in 2017.

Protecting your investment—despite knowing that you will never make back the money you put into it—is a primary reason for buying car insurance. Let's take a look at how to calculate how much you need, which is affected by where you live and your financial situation.

Mandatory Minimums and Liability Insurance

It's essential to understand how different coverage types work to protect you before deciding how much of each you need—or if you need them at all. Note: Each state sets its own minimum car coverage levels, and many require several different types of insurance. To find out what your state requires, check the Insurance Information Institute's Automobile Financial Responsibility Laws By State.

Liability insurance is the only must-have coverage. Nearly every state requires motorists to carry it. Only New Hampshire does not. Yet, the Granite State, like every other state, still holds motorists responsible for any damage they cause in a collision. That may explain why nearly 80% of the state’s drivers carry liability. Virginia also waives the liability requirement if you pay the state $500. It doesn’t protect your assets, but it does allow you to drive uninsured.

Liability pays for the other driver's property damage and bodily injuries in a collision that you cause. That includes vehicle repairs/replacement and fees to fix damaged landscaping, buildings, and other structures, as well as medical care (hospital stays, rehabilitation, and long-term care).

There are three primary limits of liability coverage in an auto policy, which you'll often see summarized by a ratio of three numbers. In New Jersey, for instance, the minimum requirements for liability are 15/30/5. The first number is the maximum your insurer will pay for injuries to a single person after an accident; in this case, $15,000. The second figure—$30,000—is the maximum for injuries to everyone you hurt in the accident. The third number—$5,000—represents the maximum amount your insurer will pay for property damage you caused in the collision.

How much liability insurance should you buy?

Though saving money might be high on your list of priorities these days, purchasing the minimum amount of liability isn’t wise. Granted, the minimum is all you are technically required to carry. But state minimums for liability insurance may not cover the value of all your assets. Remember, liability insurance protects your financial assets, so having more coverage can keep your savings, home, and wages safe should a worst-case scenario occur.

Our recommendation is to purchase enough liability insurance to cover the value of your assets (house, car, savings, and investments). Most experts recommend at least $100,000 per person/$300,000 per accident for bodily injury, and approximately $40,000 for the replacement value of the average car.

Note, too, that insurance companies have limits on how much they are willing to protect under a normal policy. If your car insurance company doesn't have a policy with limits high enough to cover all your assets, consider an umbrella policy, which expands auto and home liability insurance beyond the normal limits provided by your insurer. It is designed to cover those who have extensive assets and who are, thus, exposed to more risk.

Collision and Comprehensive

Besides the various forms of liability insurance, the most common types of coverage are collision and comprehensive. Both are optional in most states, but both are required by lenders around the country if you want to finance or lease a vehicle.

Unlike liability insurance, which only helps cover damage you cause to another person's property in an accident, collision covers damage to the policyholder's car resulting from running into anything, be it another car, a building, a tree, or something else.

Depending on your vehicle's value, collision coverage could be a worthwhile investment that saves you money in repair costs. But if your car is older and its value has depreciated significantly, you might want to consider dropping collision from your policy as it will never pay out. Insurance providers won't pay for the cost of repairs that exceed the value of the vehicle.

Many experts recommend weighing your vehicle's value against your collision coverage deductible (what you'd pay out of pocket after submitting an insurance claim) and the annual cost of your insurance. Common deductible amounts are $250, $500, and $1,000. If the deductible and cost of coverage are higher than your car's cash value, collision insurance isn't for you.

Comprehensive coverage protects your vehicle in case of theft, fire, natural disasters, or other unexpected problems—anything but a collision. It typically comes with a coverage limit equal to the cash value, or fair market value, of your car. By all accounts, comprehensive is inexpensive and well worth it.

Personal Injury and Uninsured Motorist Coverage

Personal injury protection (PIP) is worth considering as it pays your medical bills and those of your passengers. It also covers lost wages and whatever other costs may arise when you're injured in a vehicular accident.

Before you purchase PIP, be sure to study your health insurance policy so you don't pay for something you don't need. A decent health insurance plan will most likely be better than purchasing the bare minimum personal injury protection coverage. However, if you often carry passengers, PIP may be a good investment.

Finally, there is uninsured motorist coverage (UM). This is a must, says Michael Barry, senior vice president of the Insurance Information Institute, because "one-out-of-seven to one-out-of-eight drivers in this country don't have any insurance." Uninsured motorist coverage protects you if another driver is found legally responsible for damages related to an accident and doesn't have insurance or enough insurance to pay for your medical or repair bills.

The Bottom Line

Every car owner purchasing auto insurance should determine what will fit into their household budget. Make sure you know your state's minimum insurance requirements, the book value of your car, and the value of your assets (house, savings, investments) that need to be protected before you get quotes from car insurance providers. It can be helpful to consult an independent agent, who can provide policy options from a number of different companies in a short time period.