How Much Car Insurance Do I Need? Policy Types and More
“Do I need car insurance?” That’s an easy “yes,” whether because of state law or just financial protection.
“How much car insurance do I need?” That can be trickier to answer.
Do I Really Need Car Insurance?
Car insurance, like health and life insurance, is necessary to ensure you can cover costs from small inconveniences like fender benders to a major accident that results in total loss and injuries. While the monthly premium may be unattractive, you’re better safe than sorry when it comes to your vehicle.
For starters, all states but Virginia and New Hampshire legally require residents to carry insurance. Virginians can avoid carrying insurance for an annual fee of $500 paid to the Department of Motor Vehicles. To be clear, the fee doesn’t get them anything in the event of an accident but prevents them from facing fines and license suspension.
New Hampshirites aren’t messing around with their “Live Free or Die” motto. No car insurance is required in the Granite State, however, in the event of an accident, the responsible driver is on the hook for all property damage and bodily injury fees, which can cost hundreds of thousands of dollars depending on the severity of the accident. The same is true in Virginia.
So what happens if you cause an accident resulting in property damage, injury to someone else or yourself, or even someone’s death — and you have no insurance? While Virginians and New Hampshirites don’t face the same fines and license suspension risks as residents in other states, all drivers should be concerned about their financial welfare. If you are deemed responsible for the accident and subsequent injuries, your assets (house, car, savings) can be seized and your wages can be garnished until you have paid off your debts.
In short: Driving without insurance can lead to financial ruin. Don’t risk it.
How Much Car Insurance Do I Need?
The easy answer: Most drivers should get full coverage, which typically includes liability, uninsured/underinsured motorist, and collision/comprehensive. However, the combination of insurance types (including extended coverage options) and the amount of each that you buy and the deductibles can vary greatly.
Consider four factors when making this decision:
- What is your car’s value?
- What are your driving habits?
- Where do you live?
- How much can you afford to pay out of pocket?
Someone who has a car that is worth less than the gas in the tank does not need coverage on their own vehicle because any repair is likely not worth the deductible. Someone who works from home or lives in a two-car household can probably forego rental reimbursement. Folks in the 31 states that only require liability can consider skipping all other car insurance coverage. And those with an emergency savings account can go with a high-deductible plan.
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Let’s explore the types of car insurance coverage to determine what you may need — and how much.
Types of Car Insurance Coverage
In many states, liability insurance represents the bare-minimum coverage required. It does not provide for your own auto repair costs and/or hospital bills, but it does cover any property damage or bodily injury that you cause in an accident.
Do I need it? Yes, everybody should carry liability insurance, regardless of whether your state requires it otherwise risk financial ruin.
How much liability insurance do I need? Experts recommend that you should purchase as much liability coverage as you can afford or at least enough to cover the total value of your assets/net worth. By doing this, your house, savings, etc. are protected in case you are at fault in an accident.
Liability insurance is typically described with three numbers representing dollar amounts, separated by slashes. For example, 50/100/50 or 100/300/100 (that’s $50,000, $100,000 and $50,000 or $100,000, $300,000 and $100,000 respectively). The first number is the per-person dollar amount limit for bodily injury liability; the second number is the per-accident limit for bodily injury liability; and the third number is the property damage liability limit. Again, liability insurance does not cover any of your bills; it is merely a way to protect your assets.
If you drive an older car, don’t own a home and have a modest savings account, you can probably get away with 50/100/50. However, most financial experts suggest that middle-income drivers opt for the 100/300/100 coverage.
Be aware of the price jump from bumping up from 50/100/50 (on average $6 a month) to 100/300/100 (on average $93 a month). But a difference of $87 a month could mean not going into massive debt to cover $150,000 of someone else’s medical bills.
Not as many states require uninsured motorist coverage and/or underinsured motorist coverage compared to those that require liability auto insurance, but it is still strongly recommended. Though it seems unfair, uninsured/underinsured motorist coverage is all about covering your medical bills and repair costs if another driver causes an accident but does not carry enough car insurance or any at all.
Do I need it? Even if your state doesn’t require it, you should carry this type of auto insurance coverage to protect your assets.
Collision and Comprehensive
Collision and comprehensive coverage are often combined depending on the way that your insurance company bundles policies.
Collision insurance covers damage to your vehicle regardless of who is at fault. Collision coverage carries a deductible.
Comprehensive insurance also covers damage to your vehicle but when it is not being driven. Instead, comprehensive coverage is for damage to your vehicle from non-accidents: weather, vandalism, falling objects and even theft. Like collision coverage, comprehensive carries a deductible.
Do I need it? That depends. If you have a newer car that is worth repairing or replacing should something happen to it, you should carry collision and comprehensive. Comprehensive is especially important in areas prone to flooding or wildfires.
How much collision and comprehensive auto insurance do I need? When you opt in to collision and/or comprehensive, you will select a deductible that you are comfortable paying. The higher the deductible, the cheaper the coverage. You should opt for the highest possible deductible that you can afford.
A note on deductibles: To keep insurance costs down, opt for higher deductibles. This will save significant chunks of change each month. As a savvy Penny Hoarder, you should create an emergency savings account specifically for auto accidents. Once you have saved enough to cover the high deductible, you can pay lower monthly insurance premiums without worrying about how you’ll cover the deductible in the event of an accident.
As your car ages, you may be less likely to want to spend a significant amount to repair that vehicle. If your vehicle is at the point where you’d rather get rid of it (should something happen) than shell out $1,000 or more to fix it, then you can potentially drop collision and comprehensive altogether. Just note that in that case your insurance won’t cut you a check for totaling out your vehicle.
Personal Injury Protection (PIP)
Personal injury protection (known as PIP) is legally required in some states and covers medical expenses, therapy, funerals, lost wages and even “substitute services” (think lawn care or childcare if an injury prevents you from carrying out typical responsibilities). PIP usually has a deductible.
Some auto insurance companies also offer medical payments coverage (called MedPay), which is similar in that it covers medical payments resulting from an accident.
Do I need it? If your state requires it but you have good health insurance, opt for the legally mandated bare minimum. If you have no health insurance, it could be a good idea. Opt out if your state does not require it and you have good health insurance and disability insurance.
Guaranteed Auto Protection (GAP)
Guaranteed auto protection (known as GAP) protects your investment. If your newer car is totaled as the result of an accident or theft, collision and comprehensive coverage will only pay out the actual cash value of the vehicle. Because cars, trucks, and SUVs depreciate as soon as you drive them off the dealer lot and lose 20% of their value in the first year, you may end up owing more on a loan or lease than your comprehensive and collision coverage pay out. GAP insurance is there to, well, fill in the gaps.
Do I need it? Many lenders require you to carry GAP insurance if you have a loan or are leasing a vehicle. Once the vehicle is paid off, it is up to you if you want to continue GAP insurance.
Consider buying a used car with cash to avoid depreciation and to save money.
Along with the options above, most car insurance policies offer additional coverage that you should typically decline. Common options include:
- Roadside assistance: If you have roadside assistance through your vehicle purchase or a program like AAA, you should decline.
- Rental car reimbursement: Skip this coverage if you work from home, can temporarily carpool with a friend or family member or live in a two-vehicle household.
- Personal item coverage: Don’t leave costly items unattended in your car even if it’s locked and you won’t need to worry about covering the cost if they are stolen.
- Rideshare coverage: This covers drivers for services like Uber or Lyft, as the companies only offer protection when you have a customer in the vehicle. If you are in an accident while working but in between passengers, this coverage can help. It is not applicable to most drivers.
Looking for more ways to save on car insurance? Check out some of our tips for cutting costs on your auto insurance policy.
Timothy Moore is a market research editing and graphic design manager, and a freelance writer and editor covering topics on personal finance, travel, careers, education, pet care and automotive. He has worked in the field since 2012 with publications like The Penny Hoarder, Debt.com, Ladders, WDW Magazine, Glassdoor and The News Wheel. He lives in Ohio with his fiance and their dog, Goomba.