First Things First: State Minimums
Before you even think about other areas of coverage, make sure you are first meeting your state’s minimum requirements for auto insurance. If you drive without having the minimum requirements in place, you could be ticketed and assessed a steep fine; for subsequent offenses, you could even have your license suspended or your vehicle impounded. Liability insurance is a fundamental part of nearly every insurance policy because drivers in every state are required to purchase it by law. This important coverage pays out if you cause an accident that injures or kills another person or their passengers, or damages their property. Liability insurance also pays out for any legal costs or damages if you are sued by someone that you injured, up to your policy limit.
Minimum liability requirements vary significantly by state, with Wisconsin, Alaska, and Maine requiring some of the highest state minimums in the nation, and Florida, New Jersey, and Ohio requiring some of the lowest. One of the more common state minimums is 25/50/25, which is shorthand for $25,000 worth of coverage for bodily injury caused to one person, $50,000 for bodily injury for an entire accident, and $25,000 for property damage.
Some states’ requirements stretch beyond the basic liability coverage. For example, in Minnesota, drivers are not only required to carry liability coverage, but they are also required to purchase Personal Injury Protection (PIP) coverage, and uninsured and underinsured vehicle coverage. PIP coverage pays out if you or anyone else covered on your policy or riding as a passenger in your vehicle is injured in an accident, while uninsured or underinsured vehicle coverages kick in if an uninsured or underinsured driver crashes into you and causes you injury or property damage.
Next Up: Minimum Lender Requirements
Even after meeting state requirements, drivers who are paying a car loan are subject to the minimum standards set by the bank that issued the loan. Lenders often require drivers to carry full coverage, which will include collision and comprehensive coverage, to protect their interest in the vehicle since they still technically “own” the vehicle. Drivers who lease vehicles also must typically hold this type of coverage, which covers damage to your car. Once your car is paid off and you hold the title, you are within your rights to drop collision and comprehensive coverage since they’re not required by law. If you do drop this coverage, you must be willing to pay out of pocket for any damage to your car if you wreck it or if your car has a surprise meeting with a deer that cuts across your path on your way home from work.
Should I Go with the Bare Minimum?
If you want to pay the rock bottom price for insurance, you can simply choose to go with the minimum that is required in your state and from your lender. And once your car is paid off, you may even opt to drop collision, comprehensive, uninsured motorist, and other coverages entirely and go solely with the state minimum. While this choice will surely save you money, it can also expose you to a great deal of financial loss should you cause a serious accident. That’s why it’s not the best decision for most drivers.
For example, if your state has a particularly low liability limit, and you buy only enough insurance to meet that limit, you will be on the hook for whatever expenses go above or beyond this low policy limit.
Example: Your insurance policy covers $25,000 worth of bodily injury liability, and you cause an accident that puts someone in the hospital and causes $75,000 worth of injuries — you will be responsible for paying the additional $50,000.
An expense like this can easily cause financial ruin. To make matters worse, you can be sued by the injured party and your assets can be seized or wages garnished to pay the judgment for whatever your insurance didn’t cover. For this reason, it is recommended that you purchase as much liability insurance as you can afford. Going with the state minimum is really only a good option for extremely cash-strapped drivers with no family and few assets.
Tip: Drivers with a high net worth may be particularly vulnerable to lawsuits. For this reason, it is recommend that you tally up the total value of your assets and purchase liability insurance in an amount that equals that total. If the maximum amount of liability coverage does not cover all of your assets, consider purchasing umbrella insurance, which will protect you if you are sued for an amount that exceeds your auto liability limit.
Do I Need Uninsured/Underinsured Vehicle Coverage?
Uninsured and underinsured vehicle coverage is not required in every state, but that doesn’t mean it’s not important. If you get in a wreck with another car where the other driver is at fault, and that driver either has no insurance at all or doesn’t have enough insurance to cover damage to your car and/or injuries you or your passengers, you’ll truly regret not having purchased coverage in these areas. In most states, another scenario where uninsured vehicle coverage comes into play is if you are the victim of a hit-and-run accident. Having another driver total your car only to flee the scene is a nightmare scenario, but having no coverage for it is even worse. A third scenario may not involve you as a driver. You could be walking across the street at a crosswalk, or cycling in the bicycle lane, and be struck by an uninsured driver or a hit-and-run driver, and this coverage would kick in. For this reason, it is recommended to purchase these coverages and in the same amount as your liability policy — for as much as you can afford.
You should strongly consider high limits of uninsured/underinsured vehicle coverage if:
- You have a family and are the primary breadwinner in the home. If you are hospitalized as a result of a wreck caused by an uninsured or underinsured driver, your insurance may cover lost wages, which could help your family stay afloat while you’re out of commission.
- You live in a state with a higher rate of uninsured drivers than the national average. In 2009, the five states with the highest rates of uninsured motorists included Mississippi, New Mexico, Tennessee, Oklahoma, or Florida, according to the Insurance Research Council.
- You live in a tort state rather than an at-fault state. No-fault states allow your own insurance company to cover you for property damage or bodily injury regardless of who caused the accident, while car insurance companies in tort states pay out based on who’s at fault. This makes you more vulnerable to financial loss by uninsured drivers in tort states.
Tip: Many states allow you to purchase uninsured motorist property damage (UMPD) insurance, which will cover the cost of property damage only, not bodily injuries caused by uninsured drivers. If you have a good health insurance policy that will cover you in case you’re injured by an uninsured driver, choosing to only protect yourself against property damage could save you money. Just remember that health insurance will only cover your medical expenses, not any lost wages.
Do I Need Personal Injury Protection (PIP)?
PIP pays for medical or funeral costs for you or members of your household if you or they are injured in a wreck, whether you caused the wreck or not. If you already have health, disability, and life insurance policies through your work or through policies that you purchased individually, you may not need PIP. You would essentially be doubling up your coverage. If you don’t have health, disability, and life insurance policies in place, though, you leave yourself exposed to serious loss if you forgo PIP.
Tip: If you live in a state where PIP is required by law, you can opt for the minimum if you already have health, disability, and life insurance coverage.
Do I Need “Full” Coverage for My Vehicle?
Collision and comprehensive insurance, which cover damage to your vehicle, are some of the most expensive components of your insurance policy, which is why many people drop them entirely once their car is paid off and there’s no lender requiring them. However, if you forgo collision insurance, you’re on the hook for damage your own vehicle sustains in an at-fault accident even if you have more than enough in liability coverage to cover damage done to the other vehicle. Similarly, if you forgo comprehensive insurance, you’re on the hook for damages caused by vandalism, animals, falling objects, fire, and severe weather.
A good rule of thumb when evaluating your need for full coverage is knowing how much your car is worth. If you’re not sure, you can consult Kelley Blue Book. Since vehicles lose value over time, you may want to start considering dropping collision and comprehensive coverages when you vehicle’s value sinks below $3,000 or if your vehicle is more than 10 years old. At this point, it starts to be more likely that cost of repairs would actually exceed the amount your car is actually worth, and these coverages wouldn’t make much sense. If your car has depreciated to the point where you could feasibly replace it out of pocket, this might be a good time to drop these coverages as well. Finally, consider how often your car is actually used, and where it is used. If you work from home or have a vehicle that is only used occasionally, the chances of you wrecking that vehicle are much less, and you might consider dropping these coverages.
Tip: To save money on comprehensive coverage, you can often get a discount coverage by having an anti-theft device installed in your vehicle.
How Much Should My Deductible Be?
If you are determined to keep collision and comprehensive coverages on your car while keeping your premiums low, you should choose the highest deductible that you can afford to pay out should you get in a wreck. This will require a little financial forethought on your part, as you will need to have enough cash in an emergency fund to pay this deductible should you damage your vehicle in a wreck. One caveat: You don’t want to pick a deductible that’s so high that it’s unlikely you’ll ever reach it, but you should at least get a quote from your insurer that shows how much you will save by bumping up to the next highest deductible.
You also need to take your driving history, and the driving history of others insured on your policy, into consideration when choosing a deductible. If you haven’t had a claim in five or more years, you might want to gamble that you’ll continue to stay claims-free and go for that $1,000 deductible, but if your spouse is a bit of a speed demon with a wreck to show for it, you might gamble on a lower deductible. If you’re insuring a teenager who’s just learning to drive, it’s probably smart to select a lower deductible, such as $500 or $250.
Tip: Before you raise your deductible, make sure it is actually financially worth your while. In some cases, raising your deductible from $500 to $1,000 might only save you $60 a year, which probably isn’t worth it considering the extra risk you’re taking on. However, if doing so saves you $100 or more, it might be something to think about, particularly if you have a good driving history.
Trim The Fat: Add-Ons
Perhaps the easiest thing to remove from your policy are add-ons and perks like roadside assistance, replacement car coverage, and glass replacement. If you have an emergency fund in place for instances like this, you can easily remove them and save yourself the premium dollars. However, add-ons like this are typically cheap to tack on to a policy, and you may decide you’d rather pay a little extra for the convenience.
Tip: One auto insurance “extra” that might be worth it is Guaranteed Auto Protection, or GAP insurance. This coverage will pay the difference between how much your car is actually worth and how much you still owe to your auto lender if you total your car. This will rescue you from getting stuck making payments on a car that you can’t drive and is good for nothing but a junkyard. Most banks and lenders offer this insurance, but some auto insurers provide this type of coverage, as well.
While deciding how much auto insurance you need is not a one-size-fits-all process, there are some common-sense ways to decide how much insurance you need for your unique situation. While every driver needs to at least maintain state minimums, other coverages may or may not make good sense financially.