Introduction of How Much Car Insurance Do I Really Need
Selecting the right amount of auto insurance coverage can be confusing. While state laws mandate minimum liability limits, experts agree this is often not enough protection. Read on to learn what key factors determine appropriate coverage levels for your situation.
Hook: Steve was thrilled when he bought his first new car right after college graduation. He opted just for the state minimum liability coverage required, thinking it would save money on premiums. A few months later another motorist ran a red light and totaled Steve’s new vehicle. Not only did Steve still owe money on the car loan for the destroyed vehicle, but he was sued by the other driver for extensive medical bills. Steve’s assets were at risk because his liability coverage was far below what was needed to cover the damages. After depleting his savings to get through this ordeal, Steve learned an important lesson about being underinsured.
Thesis – While it may be tempting to minimize coverage to lower your auto insurance costs, having inadequate protection can lead to massive financial headaches down the road. It’s critical to take the time to carefully evaluate your specific situation and insurance needs. This ensures you get liability limits, deductibles and additional coverages tailored to appropriately handle potential scenarios. The peace of mind of having sufficient coverage in case the unexpected happens is well worth the investment.
How Much Liability Coverage is Enough?
Liability insurance covers bodily injury and property damage you cause to others when an accident is deemed your fault. It can pay for expenses like medical bills, lost wages and vehicle repairs or replacement for the other impacted parties. Each state establishes minimum liability coverage requirements drivers must meet. However, these minimums often fail to provide sufficient protection based on today’s healthcare, vehicle and legal costs. That means picking merely the state-mandated minimum liability limits leaves you vulnerable to potentially massivejudgements against you in the event of a serious at-fault accident.
So how much liability coverage should you consider? Here are some key factors that determine appropriate limits:
Financial Situation: If you have significant assets or property that could be seized in a lawsuit, you need robust liability protection. Even with insurance, you’re still responsible for any damages that exceed your coverage maximums. If you own a home or have substantial savings, minimum liability will likely be inadequate. Umbrella insurance policies can provide additional liability coverage beyond auto policy limits at relatively low cost.
Driving Record: Those with spotless records can justify lower limits. But if you’ve had moving violations, at-fault accidents or DUIs, you’re at higher risk for a future incident. Thus, choosing higher liability limits helps hedge against the increased likelihood you’ll need the coverage.
Vehicle Type: If you drive an economy car, you might get by with lower liability as repairs or medical bills for other parties are likely smaller in a minor accident. However, if you own an expensive luxury vehicle, repairs costs are far higher. Others also assume you have assets if you drive a high-end automobile. Both factors warrant increased liability protection.
Location: In more litigious regions, lawsuit risks and payouts tend to be greater. If you live in an area with higher average settlements and verdicts, having robust liability coverage gives you better protection. Consult with a local agent on appropriate limits and risks for your jurisdiction.
Driving Frequency: The more time you spend behind the wheel, the more exposure you have to accident risks. Infrequent drivers can justify lower liability, but policy limits should be higher for those with longer commutes or who drive as part of their job.
So given these factors, what liability coverage amounts should you consider? Here are some general guidelines on reasonable minimums:
- $100,000 bodily injury per person
- $300,000 bodily injury per accident
- $100,000 property damage per accident
However, even $100k/$300k/$100k may not suffice in many situations. Those with substantial assets and net worth may prefer $250k/$500k/$250k or even $500k/$1M/$500k limits. Consult with an experienced insurance agent to determine appropriate amounts based on your specific profile and risk tolerance. An independent agent or broker can provide guidance across multiple insurers, unlike captive agents representing just one company.
An easy rule of thumb – purchase enough liability coverage to fully protect your assets and net worth in a worst-case accident scenario. Don’t forget that medical expenses and vehicle repair costs balloon each year. Limits that seemed adequate 5 years ago may no longer provide sufficient protection. Revisiting your liability needs every renewal is wise.
Strategies to Lower Liability Premiums:
Liability coverage makes up a significant portion of overall auto insurance premiums. Here are some strategies that can help minimize the cost of ample liability protection:
- Increase deductibles – Having higher deductibles translates to lower liability premiums. Just be sure you have savings to cover the out-of-pocket costs.
- Bundle home & auto policies – Insurers reward customers who buy multiple policies. Bundling can net you a multi-policy discount of up to 15%.
- Maintain good credit – Insurers use credit-based insurance scores to set premiums. Keeping your score high results in lower rates.
- Ask about discounts – Taking defensive driving courses or having anti-theft devices can also drop liability costs. Inquire about every potential discount.
- Compare quotes regularly – Rates and discounts vary significantly among insurers. Check them at least once a year to find potential savings.
What Kinds of Extra Coverages Should You Get?
In addition to liability, most auto policies include various supplementary coverages. These provide protection for losses and damages to your own vehicle.
The most common add-ons are:
Comprehensive – Provides protection against non-collision damage such as theft, vandalism, fire, hail, floods or animal strikes.
Uninsured/Underinsured Motorist (UM/UIM) – Pays for injuries to you or passengers if the at-fault driver has no insurance or inadequate coverage.
Personal Injury Protection (PIP) – Provides immediate medical expense coverage for you and passengers, regardless of fault.
Towing/Labor – Covers costs of towing and roadside assistance for disablements.
Rental Reimbursement – Pays for a rental car while yours is in the shop after a claim.
GAP Insurance – Covers any shortfall between auto loan balance and actual cash value of totaled vehicle.
While state laws don’t mandate these add-ons, they fill critical gaps not addressed by liability coverage alone. Carrying enough of the right supplemental coverages for your situation is wise.
When Extra Coverages Become Essential:
Certain driving profiles and scenarios make having ample extra protections beyond mere liability an absolute must:
- New vehicle with collision & comprehensive – You want full coverage to avoid major expense if your new car sustains damage.
- Leased or financed vehicle – Lienholders require you carry collision and comprehensive. Lacking either risks repossession.
- Area with high car theft rates – Comprehensive coverage is vital in regions with frequent vehicle thefts.
- Vehicle modifications – Extra coverage needed if car has expensive customizations like turbochargers, audio systems, etc.
- Teen drivers – Their accident risk makes collision and comprehensive wise to prepare for mishaps.
- Regular accident claims – Those prone to frequent collisions should get ample extra protection.
- High medical costs – Having ample PIP, UM/UIM ensures expenses covered if health insurance falls short.
How Much Coverage Do You Need?
Precisely how much extra coverage you should carry depends on your specific vehicle’s value, your finances, and risk tolerance.
Insuring an older, low-value automobile often doesn’t justify paying for collision and comprehensive versus simply saving up in case repairs ever become necessary. Carrying just liability makes sense once a vehicle drops below around $3,000 in value.
However, you’ll likely want to maintain full coverage as long as possible on a newer automobile to avoid expensive out-of-pocket costs. If you can’t easily pay cash in the event your vehicle gets damaged, robust supplemental coverages provide peace of mind.
Analyzing your unique situation with an experienced agent helps determine appropriate extra coverage levels. An insurance professional can explain what options deliver protection tailored to your needs at a premium cost that aligns with your budget.
Finding the Right Balance:
It’s natural to want to trim extras like collision and comprehensive to pare down premium costs. But don’t sacrifice critical protections just to save a few dollars. The right insurance specialist helps craft a policy with premiums and coverage levels that fit your circumstances, with no major gaps in protection.
Often simply tweaking a deductible is an effective way to reduce premiums while still keeping necessary safeguards. For example, bumping your collision deductible from $500 to $1,000 could drop your premium by 15-30% in some cases. Just be ready to pay the higher deductible amount out of pocket if you do file a claim.
How Deductibles Factor Into Your Premiums
A deductible is the amount you pay out-of-pocket on an insurance claim before coverage kicks in. So if you have a $1000 collision deductible and get in an accident that causes $6,000 in damage to your car, you would pay $1000 toward repairs, and insurance would cover the remaining $5,000.
Deductibles apply separately to the various coverages – collision, comprehensive, etc.
Some key considerations:
Higher Deductible, Lower Premium: Insurers reward you with discounted premiums for accepting higher deductibles because less of your potential claims end up getting paid by the carrier. Going from a $250 to $1,000 deductible might reduce premiums by up to 40% depending on other factors.
Lower Deductible, Higher Premium: Paying for the convenience of a lower deductible means higher monthly premiums. You have to assess if the savings on out-of-pocket costs in the event of a claim justifies the cost of pricier premiums year after year.
Ability to Pay: If you lack cash savings, lean towards lower deductibles. But with ample emergency funds, you can take advantage of cheaper premiums by accepting higher deductible amounts without worry.
Claim Frequency: How often you file claims also determines if lower deductibles make sense. Infrequent filers save with higher deductibles, while frequent filers benefit by minimizing out-of-pocket costs.
What deductible amounts generally make sense for most people? Here are reasonable guidelines:
- Liability coverage – $500. Only impacts premiums, not out-of-pocket claim costs. Maximize this for discount.
- Collision/Comprehensive – $500 to $1,000 or higher if you have ample savings. Keep lower if concerned about cash outlay.
- PIP medical – $500 to $1,000. Again, keep lower if limited ability to pay initial treatment costs.
- UM/UIM bodily injury – $100 to $250 per person. Having cash for immediate medical care is wise.
- Towing/rental car – $100 to $200 to incentive using insurance versus paying these small costs yourself.
Bundling Home & Auto for Lower Deductibles:
One smart strategy to reduce deductibles across homeowners and auto is bundling multiple policies with the same carrier. This allows you to set one shared deductible for both home and car coverage. Then a claim on either policy satisfaction of the single deductible for a policy term. This avoids paying deductibles twice if you happen to have an auto accident and home mishap in the same year.
Ways to Get the Best Rate on Your Policy
While having sufficient coverage tailored to your needs is crucial, you also want the best possible rate.
Auto insurance premiums are based on a variety of factors below:
- Driving Record – Tickets, accidents and serious violations like DUI raise your rate substantially. Multiple incidents can mean very expensive premiums.
- Vehicle Type – Sports cars, luxury brands and high-horsepower rigs have pricier premiums due to performance, repair costs and theft risk.
- Age – Teens and seniors have higher average accident rates leading to increased premiums. Middle-aged drivers get the best rates.
- Sex – Statistics show young males have more claims. This drops as they age, leading to lower premiums.
- Marital Status – Married drivers, especially middle-aged, get better rates due to lower perceived risk. Single drivers pay more.
- Credit History – Insurers use credit-based insurance scores heavily in setting premiums. Keeping your credit profile clean saves money.
- Location – Insurance rates are dictated by associated risk in your region. Urban areas cost more than lower risk rural zones.
- Annual Mileage – Driving fewer total miles lowers your risk exposure, resulting in discounted premiums.
- Usage – Occasional pleasure use gets lower rates than daily driving or high annual mileage.
Storing your car rather than daily driving, consolidating policies with one insurer, maintaining loyalty with one carrier over many years, and asking about every possible discount are other avenues to lower premiums. Shopping around at least annually also ensures you get the best rate for your profile as insurers constantly adjust formulas.
A newer option is usage-based insurance through programs like Progressive’s Snapshot or State Farm’s Drive Safe & Save. You install a monitoring device providing data on driving habits like mileage, speed, acceleration and braking. Safe driving can then earn steep discounts off your premiums. However, risky behaviors may increase your rates. Usage-based insurance helps align premiums closely with actual driving behaviors versus just general risk factors.
Common Mistakes to Avoid
It’s easy to make decisions that seem to save money on premiums but that leave you woefully underinsured.
Some frequent errors include:
- Picking merely state minimum liability without considering assets at risk.
- Dropping comprehensive/collision coverage on an older vehicle too soon just to save money.
- Failing to realize many policies exclude regular rideshare use – a gap that could leave you unprotected.
- Overlooking advantageous discounts like multi-policy, good student, anti-theft devices, etc.
- Declining UM/UIM to save money when you’ve incurred high medical expenses before.
- Choosing lower PIP limits despite having inadequate health insurance.
- Not reassessing needs periodically as you acquire assets or policies change.
Ask yourself if potential savings today are worth the massive financial risk of being underinsured should a serious accident occur. Don’t jeopardize your family’s financial security to shave a bit off your premiums.
Protecting your assets, vehicles and financial well being requires having adequate auto insurance tailored to your specific situation. While state-mandated liability minimums provide some coverage, experts agree this is often insufficient, especially for drivers with substantial assets.
Carefully consider your profile including driving record, vehicle types, assets and risk factors. This allows properly customizing liability limits, deductibles, and extra coverages like collision, comprehensive, PIP and UM/UIM. An experienced independent agent provides guidance identifying the optimal insurance mix delivering sufficient protection at reasonable cost.
Reviewing your policy at every renewal ensures limits, deductibles and coverages reflect any life changes while taking advantage of savings opportunities. Don’t end up like Steve, underinsured and suffering major financial consequences. The right insurance brings peace of mind and financial stability when the unexpected occurs.
How do I know if I’m underinsured?
Review your policy limits and deductibles. If they are close to state minimums, you are likely underinsured, especially if you have significant assets or high risk factors. Discuss your full profile with an independent insurance agent to assess if your current coverage would sufficiently protect your finances in a moderate to serious accident.
Does my credit score impact my insurance rate?
Yes, most insurers use credit-based insurance scores as a significant rating factor. Maintaining a high score typically results in lower premiums. Poor credit can increase your costs. Improving your credit health can potentially provide big savings over time.
Do I need rental car coverage if I already have a credit card that covers it?
Likely not, as long as you pay for the rental transaction with that card. However, your credit card company may only provide coverage for a short time, while an insurance policy add-on gives you flexibility on the rental duration. Also your credit card may not cover certain vehicle types. Review coverages to be sure there are no gaps.
Can I save money by raising my deductible?
Yes, increasing deductibles lowers premiums, in some cases significantly. But be sure you have adequate savings to cover the higher out-of-pocket costs you’d pay if you file a claim. Avoid choosing an excessively high deductible relative to your finances just to reduce premiums.
What discounts should I ask about when getting a car insurance quote?
Always inquire about multi-policy, safe driver, good student, anti-theft devices, usage-based programs and any other discounts. Also ask if paying premiums in full upfront rather than monthly provides a break on costs. Discounts provides an easy way to reduce your premium outlay.