How Much Auto Insurance Do I Need?

How Much Auto Insurance Do I Need ?. When you've got that proverbial "set of wheels," you need to know how much, or how little, insurance coverage is best for protecting them.

Shopping for the right amount of car insurance requires some homework and an evaluation of how much coverage your wallet can handle.

"You can always pay less for car insurance, but it's important to remember that you typically get what you pay for," says Larry Thursby, vice president of auto product and pricing at Nationwide Insurance.

Who should buy minimum levels of liability car insurance?

If you own only the clothes on your back and a very old car, you're probably what is known as "judgment-proof." You may lose if someone decides to take you to court, but you have no real assets to take. If you have savings or a home or even expensive jewelry, you are not judgment-proof.

We've created four liability insurance levels as a rough guide. 

In the levels below, the first two numbers refer to bodily injury liability, which pays the hospital bills of anyone you injure. The first number is the per-person limit; the second is the per-accident limit. The third number is the property damage liability limit, which would repair or replace the car of anyone you hit.

State minimum liability car insurance:  In most states this is not enough to pay for serious injuries or to replace a newer car. It is only enough to drive legally.

50/100/50: As your net worth rises, increase your coverage to match. Your net worth is the value of what you own minus what you owe.  Assets would include your home’s current value, any other real estate, your car (do not count the value of a leased car, though), stocks, checking and savings, retirement accounts,  jewelry, household items and the cash value of a life insurance policy. Liabilities would include the outstanding balances on mortgages, car loans, student loans and credit cards.

100/300/100: This is the level most financial experts say is appropriate for middle-income earners with a typical level of savings, adequate in most circumstances. The cost of liability insurance, once you have bought the basic levels, does not increase exponentially. Moving to 100/300/100 will not cost twice as much as 50/100/50. You may find the additional coverage will cost only a few dollars a month.

250/500/100: If you own an expensive home or have saved diligently, you may be worth millions even though you do not consider yourself rich. We would suggest supplementing even this high level of coverage with an umbrella liability policy that extends your protection by $1 million or more. It’s relatively cheap.

Levels of coverage offered will vary by state and by insurer. Liability insurance will not repair your own car.

Who should buy uninsured motorist car insurance?

Your state may require that you buy uninsured motorist bodily injury coverage, which pays your hospital bills if you are hit by an uninsured driver. Your state may require only that you be offered this coverage but allow you to turn it down.

If you buy this coverage, it typically will come in the same amounts as your own liability coverage.

A few states also require uninsured motorist property damage, which usually pays for some -- but not all -- of the damage to your own car. It doesn’t cover hit-and-run accidents in most states, though.

If you have your own health insurance and you have purchased collision coverage, you may be able to skip these coverages if your state allows. We think it is a good idea to keep both of them if you can afford to, because they can minimize your financial losses from deductibles and coverage caps.

Do you need comprehensive and collision coverage?

If you owe money on your car, your lender requires you to have collision and comprehensive coverage, which would repair or replace your car. Liability insurance pays only for others’ cars.

You must choose a deductible amount for collision and comprehensive coverages. Damage below this amount is your responsibility to fix. 

We recommend that you keep deductibles low while you are still making payments on a car. Once the car is paid off, build an emergency fund and raise your deductible to match it.

If you own your car outright, you can drop these coverages. There are many rules of thumb on when to drop these additional coverages.

Do you need medical payments or personal injury protection?

Your state, especially if it is a no-fault state, may require that you buy personal injury protection so that your injuries in a car accident are always covered up to your limits, no matter whose fault the accident was. It usually includes coverage for lost wages as well.

Medical payments coverage is required by a few states but is optional in most, paying medical expenses up to your limits.  If you don’t have your own health insurance coverage, you should consider this coverage. If you have a high-deductible health plan, medical payments may help pay the deductible. 

How should you save money on car insurance?

In order of impact and potential savings, we suggest the following steps for drivers trying to save money on their car insurance bills:

• Shop around.  You will see that the rates major insurers charge the same driver in the same car can vary by hundreds, sometimes thousands, of dollars.
• Look for car insurance discounts.  
• Consider a named driver exclusion if a member of your household has a high-risk driver history.
• Raise your deductibles.
• Drop collision and comprehensive coverage altogether if you own your car outright.
• Drop other optional coverages such as uninsured motorist or medical payments.
• Reduce the amount of liability coverage you are buying.
• Park the car, turn in your plates and cancel your insurance coverage.

What insurance is required?

When determining how much insurance you need, start by investigating the insurance that you must have.

Every state, with the exception of New Hampshire, requires a vehicle owner to carry auto liability insurance. It includes bodily injury coverage, which takes care of other people's medical bills and related costs when they're injured in an accident you've caused, and property damage coverage, which pays for damage to other people's cars or other property when you're at fault.

Liability coverage has limits often expressed by three numbers in a policy. For example: 100/300/50. The first number is the limit on bodily injury coverage for one person hurt in an accident; the second number is the total payout limit for everyone who was injured; and the third number represents the total amount of property damage coverage available per accident. Each number is expressed in thousands of dollars.

Most states have a minimum bodily injury liability coverage requirement of $20,000 to $25,000 per person and $40,000 to $50,000 per accident, says Bob Passmore, senior director of personal insurance lines for the Property Casualty Insurers Association of America. State minimums for property damage liability coverage range from $5,000 to $25,000 per accident, according to Edmunds.com.

However, you probably want more than just the bare minimum.

"If you have assets to protect, like if you have a home or any sort of other assets like that, those are things that if you don't have enough insurance (and) you cause an accident where someone's seriously injured … you could wind up with some of those assets being exposed," Passmore says.

Are there any other musts?

Some states also require drivers to have personal injury protection and uninsured/underinsured motorist coverage. Personal injury protection covers medical expenses and lost wages for you and your passengers injured in an accident, and uninsured/underinsured motorist coverage pays for injuries you sustain if you're hit by a motorist with inadequate car insurance.

You can find out what coverage you are required to carry by checking with your state insurance department.

But wait, you say. Isn't there anything else that must be included in a car insurance policy? Maybe you've heard of "collision," "comprehensive" and "transportation expense coverage." Isn't any of that stuff mandatory? And, if not, would a person need it anyway?

"Everything else you might not need to purchase, so you really have to know what your own desires are and (your) needs are," says Jim Whittle, chief claims counsel for the American Insurance Association.

How about comprehensive, collision?

If your vehicle is financed, your lender generally will require you to have collision and comprehensive coverage. But once your loan is paid off, you may choose to forgo one or both types of coverage, depending on the age, make and model of your car.

Collision coverage pays for damage your car sustains in an accident; comprehensive coverage pays for damage caused by something other than a collision, such as hail or theft.

"If your car is older, then you have some decisions to make … and really what you want to think about is: 'What's my financial position? What's the premium going to be if I carry those coverages? And would I be able to financially take the hit of a loss if I didn't carry those coverages?' " Passmore says.

Use online tools, such as Kelley Blue Book, to assess your car's worth, he adds. This will help you determine whether it still makes sense to carry collision and comprehensive coverage.

Do I want other add-ons?

Many insurers offer "roadside assistance," including towing and labor coverage, in the event that your car breaks down, runs out of gas or faces a similar emergency. If you already pay membership fees to AAA or a similar auto club, then it may be financially savvy for you to decline this optional coverage.

MedPay -- short for medical payments coverage -- pays medical bills for you and your passengers if you're injured in an accident, regardless of who is at fault. The coverage is required in some states, but if you have health insurance you may decide to go without it.

Rental car reimbursement, or "transportation expense" coverage, also is optional. You may decide to go without it if you have a second car and wouldn't need a rental while your primary one is in the shop after a crash.

Other ways to cut your premium costs include increasing your deductibles and seeking out any and all discounts that may be available to you.

"As a customer, you have a lot of control over the cost of the insurance, probably more than you think," says Nationwide's Thursby.

Ultimately, how do you determine whether you have too little, or too much, car insurance?

Work with the experts, your insurance agent and insurer, says Whittle, of the American Insurance Association. "They're trained to ask questions to make sure that they're giving you the coverage you need."

How Much Auto Insurance Do I Need?