How Much Car Insurance Do You Need?
How much auto insurance do you require? The answer is determined by a variety of factors, including where you live, the value of your car, and any other assets you wish to safeguard. Here's what you should know.
How Car Insurance Works
A car insurance policy is actually a collection of several different types of insurance. The most common are as follows:
- Bodily injury liability
- Property damage liability
- Medical payments or personal injury protection
- Collision coverage
- Comprehensive coverage
- Uninsured/underinsured motorist coverage
Some of these coverages may be required in your state, while others may be optional. If you have a car loan or lease, your lender may have additional requirements. However, you may want to purchase additional insurance to protect yourself in addition to what your state or lender requires. Here's a closer look at each type of insurance and how to figure out how much you really need.
Bodily Injury Liability
What it covers: Bodily injury liability is the portion of a car insurance policy that pays for injuries caused by you or family members listed on your policy to someone else in an automobile accident.
How much coverage you need: Almost every state requires drivers to purchase bodily injury liability coverage, though the amount varies by state. Liability coverage on an auto insurance policy is typically expressed as a series of three numbers, such as 25/50/20. In this example, the first number represents the most your insurer will pay per person if you injure someone in an accident—$25,000. The second figure is the maximum it will pay per accident if more than one person is injured—in this case, $50,000. The third number denotes liability for property damage.
You must purchase at least the minimum amount of bodily injury coverage required by your state. Many states have a limit of $25,000 per person and $50,000 per accident, though some states have lower or higher limits.
However, your state's minimum requirements may not be sufficient, especially if you are involved in a serious accident. You should think about your assets and whether they would be adequately protected in the event of a lawsuit. For example, if you own your home or have a large sum of money in savings, a costly accident could jeopardize them. In that case, you should purchase additional coverage. Consumers' Checkbook, for example, recommends purchasing at least 100/300/50 coverage, just in case. The cost difference between that coverage and your state's minimum is unlikely to be significant.
If you have more assets to protect, you can get even more coverage—say, 250/500/100. You can also purchase an umbrella policy, which will increase the liability coverage on your auto and home insurance to $1 million or more.
Property Damage Liability
What it covers: Property damage liability covers the cost of causing damage to another person's car or other property (such as a tree or fence) in an accident caused by you or members of your family.
How much coverage you need: Just like bodily injury liability, almost every state requires some level of property damage coverage. It's the third number in that sequence on your policy, so a 25/50/20 policy would provide $20,000 in coverage. Some states require as little as $10,000 or $5,000 in property damage liability coverage, but $20,000 or $25,000 is more common.
Again, you may want to purchase more coverage than your state requires. However, unless you are involved in a collision with a Lamborghini or a Rolls-Royce, you are unlikely to face as much financial risk as you would in a serious injury accident. Property damage coverage of $50,000 is commonly recommended—or more if you have significant assets to protect.
Medical Payments (MedPay) or Personal Injury Protection (PIP)
What it covers: Unlike bodily injury liability coverage, medical payments (MedPay) or personal injury protection (PIP) pays for injuries to the driver and any passengers in your vehicle. In some cases, it will also cover any lost wages as a result of an accident-related injury.
How much do you require: Your state will determine whether medical payments or PIP coverage is required, optional, or even available. PIP coverage is required in states with no-fault insurance laws, such as Florida and New York. Drivers in Florida, for example, are required to carry at least $10,000. The minimum in New York is $50,000.
If you and your family already have adequate health insurance, you may not need to purchase more than the bare minimum of PIP coverage. If you don't have health insurance, you should consider getting some. This is especially true in states like Florida, where $10,000 in coverage may be insufficient if you are involved in a serious accident.
Collision Coverage
What it covers: Collision coverage will pay to repair or replace your vehicle if you are in an accident with another vehicle or hit something else.
How much you need: States don't require drivers to have collision insurance. If you have a car loan or are leasing it, your lender may require it. You can cancel your coverage once you've paid off your loan or returned your leased vehicle.
Even if it isn't required, you should consider purchasing collision insurance. For example, if you'd struggle to pay a large repair bill out of pocket after an accident, collision coverage could be beneficial.
You should also think about how much your car is worth. Collision coverage costs are determined by the value of your vehicle and typically include a deductible of $250 to $1,000. So, if your car costs $20,000 to replace, you would pay the first $250 to $1,000, depending on the deductible you selected when you purchased your policy, and the insurer would be responsible for the remaining $19,000 to $19,750.
However, as the value of your car depreciates over time, you may want to reconsider dropping collision coverage. You could be paying a lot for very little coverage if you combine the cost of your annual premiums and the deductible you'd have to pay out of pocket after an accident. When your car is worth less than a few thousand dollars, even insurance companies will tell you that dropping collision coverage makes sense.
Comprehensive Coverage
What it covers: Comprehensive insurance protects your car against damage caused by events other than a collision. This could be a fire, a flood, or a falling tree, for example. It also includes coverage for car theft.
How much coverage you need: Collision coverage is optional in most states, but if you have an auto loan or lease, your lender may require it. Again, once you've paid off your loan or returned your leased vehicle, you can cancel the coverage.
When deciding whether to purchase comprehensive coverage if it isn't required, consider your ability to pay out of pocket if your car is stolen and you have to buy a new one, or if it is damaged and you have to pay the repair bills. You should also consider how much your car is worth in comparison to the cost of maintaining it year after year.
Uninsured/Underinsured Motorist Coverage
What it covers: Just because state laws require drivers to have liability insurance does not mean that every driver has it. In 2019, an estimated 12.6 percent of drivers, or roughly one in every eight, were uninsured. Many other drivers have insurance, but it is insufficient to cover the costs of a serious accident. This is where this type of protection comes in. It can protect you and your family if you are injured or your car is damaged as a result of an uninsured, underinsured, or hit-and-run driver.
How much you need: Some states require drivers to have uninsured motorist coverage (UM). Some states also require uninsured motorist coverage (UIM).
In Maryland, for example, drivers must have uninsured/underinsured motorist bodily injury liability insurance coverage of at least $30,000 per person and $60,000 per accident. It also necessitates a minimum of $15,000 in uninsured motorist property damage coverage.
If your state requires uninsured/underinsured motorist coverage, you may purchase more than the minimum amount. You can also purchase this coverage in states where it is not required.
If you aren't required to purchase uninsured/underinsured motorist coverage, you should think about it if your current coverage would be insufficient to pay your bills if you were in a serious accident. For example, if you do not have adequate health insurance or medical coverage through your car insurance policy, it may be worthwhile to add it.
Other Types of Coverage
When shopping for auto insurance, you may come across some other, entirely optional types of coverage. Among these are:
- Roadside assistance, such as towing
- Rental reimbursement, if you have to rent a car while yours is being repaired
- Gap insurance, which covers the difference between the cash value of your car and what you still owe on a lease or loan if it is a total loss.
Whether or not you require any of these services will depend on your other resources (such as membership in an auto club) and how much you can afford to pay out of pocket if necessary.
The Bottom Line
An auto insurance policy includes several types of coverage, some of which are required by your state or auto lender, while others are optional. The decision to purchase more than the minimum required coverage, as well as which optional types of coverage to consider, will be determined by the assets you wish to protect and the amount you can afford to pay. The website of your state's motor vehicle department should explain its requirements and may provide other state-specific advice. An independent insurance agent who is familiar with your state's laws and can provide policy options from a variety of insurance companies may also be of assistance.