Wednesday, March 21, 2018

How Much Car Insurance Do I Need?

If you own a car, auto insurance is a fact of life. But how much care insurance do you really need? We answer that question in our detailed guide.

How much car insurance do you need

When it comes to car insurance, many of us are just looking to save as much money as we can. That’s not entirely a bad thing. But it could lead you to get less insurance than you actually need. So before you start shopping around for car insurance, first answer the question of how much coverage you actually need.

To help, here are several factors to consider.

Look At Your State’s Minimums

Each state in the U.S. imposes its own legal requirements for drivers. But they all require at least liability insurance. This is the type of insurance that covers the other driver and passengers if you’re the one at fault for an accident. It typically covers at least medical expenses, but often also covers property damage. That way if you run off the road and into someone’s living room, your insurer will foot the bill.

We don’t recommend getting the absolute minimum car insurance required. But this is a helpful starting place. Click here for a list of liability insurance minimums by state.

If you look at a list like this one, you’ll see that all the states listed require liability insurance, but some require additional coverage, too. We’ll quickly break down how to look at liability insurance minimums, and then we’ll talk about the other types of coverage states might require.

Looking at Liability Minimums

Liability insurance minimums are listed as three numbers. For instance, Alabama’s minimum is 25/50/25, but Alaska’s is 50/100/25.

The first number stands for the bodily injury liability maximum for one person injured in an accident. The second number is the bodily injury liability maximum for all injuries from one accident. The third number is the property damage liability for one accident.

So in Alabama, drivers need at least $25,000 per person/$50,000 per accident in bodily injury liability coverage, plus $25,000 per accident in property damage liability insurance. In Alaska, drivers need $50,000 per person/$100,000 per accident in bodily injury liability, and $25,000 per accident in property damage.

Keep in mind that this is the maximum your insurer would pay if you were at fault in an accident. But if the bills are higher than that, the injured parties could sue you for additional damages. That would come out of your own assets.

A Note on No-Fault States

In some states, there are no-fault insurance laws. This means your insurance company will pay out for your medical bills regardless of who caused the accident. This only applies to bodily injury claims. This insurance helps you get payments more quickly while the insurance companies sort out who was actually at fault.

Other Required Coverage

A majority of states only require the liability insurance we defined above. But many recover other types of insurance coverage, as well. Here’s a quick definition of the other types of insurance minimums you might see:

  • UM (Uninsured Motorist: This insurance pays medical bills for you and your passengers if you’re in an accident caused by a driver who doesn’t have liability insurance. This insurance is typically stated in two numbers, such as 25/50. This shows the policy’s per-person and per-accident maximum coverage.
  • UIM (Underinsured Motorist): If another driver causes an accident and doesn’t have enough liability insurance to cover your medical expenses, your UIM coverage would jump in and cover the difference. This can keep you from having to sue to get your medical bills covered. Coverage minimums are stated just like UM coverage amounts as two numbers.
  • UM/UIM BI: This is only bodily injury insurance for uninsured/underinsured motorists.
  • PIP: In no-fault states, this is the insurance that will pay your medical expenses if you get into an accident, regardless of who is at fault. It’s stated as a single number that shows its maximum coverage.
  • PPI: This is like PIP, except it covers property damage rather than personal injury. Only Michigan requires this type of coverage.

If your state requires these other types of insurance coverage, your state’s average premiums will likely be higher. But you’ll also have more protection for a variety of types of accidents.

Again, you should require these minimums as a starting place, not the ending place.

Talk to Your Lender

We’ll get back to the liability side of things shortly. But for now, let’s talk about what happens if your car is stolen, damaged in a storm, or damaged in an accident you cause. The above types of insurance won’t kick in in this case. You’ll be on the hook for replacing or repairing your own vehicle.

But two other types of insurance coverage–collision and comprehensive–do apply in these situations. As you might guess, collision covers damage to your car in case of an accident. Comprehensive coverage covers damages if your car is stolen or damaged in something that’s not an accident.

If you’re still making payments on your vehicle, your lender will likely require that you buy this additional coverage. Otherwise, they risk your defaulting on the loan with no collateral if your car is stolen or damaged outside of an accident.

A Note on Replacement Values

For the most part, standard collision and comprehensive policies will offer actual cash value coverage. This means the insurance company will give you up to your car’s actual cash value at the time of the damage. If your car is worth $5,000, you can get the lesser of $5,000 or the actual cost of repairs.

What if the car is worth less than it would cost to repair? In this case, the insurer considers the car totaled.

Typically when we think of a vehicle being totaled, we assume the damage is catastrophic and irreparable. But that’s actually not always the case. If you drive an older, higher-mileage vehicle that’s not worth much, even a little damage could total it. In this case, the insurance company will just cut you a check for the car’s actual cash value.

If your car is paid off and the damage isn’t enough to keep it from being driveable, you can enjoy the extra cash and keep on driving your car.

The other option is replacement cost. This lets you buy another car that is the same as your old car if your car is totaled. So if you total a 2015 Honda Accord, a replacement cost policy will give you enough funds to buy a car of similar age and mileage.

Not all insurers offer replacement cost coverage. But those that do typically make it an additional option on your standard car insurance policy. Some insurers even let you add a rider to upgrade your car to a newer or lower-mileage model. Adding the replacement cost coverage will increase your monthly premium.

One More Option: Gap Insurance

Reading through the above section, you might have thought of one potentially devastating scenario. What if you have actual cash value coverage and total a vehicle on which you’re upside down?

Say that car is work $10,000, but you actually still owe $12,000 on it. This isn’t unusual, since a car’s value plummets as soon as you drive it off the lot. But an actual cash value policy would only give you $10,000 if you total your car. Unfortunately, you’d still owe the bank $12,000. So you’re stuck paying another $2,000 for a car you can no longer drive.

This is where gap insurance comes in. It’s a special type of coverage that will pay off your auto loan if you total the car when you’re upside down on your loan. It won’t put money back in your pocket. But it will ensure your loan gets paid off without your having to suddenly come up with a few grand.

Gap insurance isn’t for everyone. But if you’re buying a car with very little money down, it might be worth a few extra bucks a month. Again, some auto insurers let you add gap insurance as a rider on your policy. Or you can purchase it from a third party or through the car dealership.

The Bottom Line on Financed Vehicles

The bottom line here is that if your vehicle is financed, you need enough insurance to cover its value. In fact, most lenders will require you to show proof of insurance–including collision and comprehensive coverage–before they’ll finalize your car loan.

If your insurance coverage could leave you unable to pay off your current car loan, look into additional options like replacement cost coverage and/or gap insurance. These options will add to your monthly premium. But you’ll likely be glad you paid the extra if you ever total your vehicle and need a new one right away.

Consider Your Own Ability to Pay

Ultimately, any kind of insurance coverage is meant to fill in our financial gaps. This is also true of car insurance, both for liability and for covering your own vehicle.

Remember, whatever costs your insurance policy doesn’t cover will fall to you. This could include huge medical bills or bills for property damage. Or it could mean paying off your current vehicle loan and getting another to replace your car.

So the state’s minimum coverage amounts may not be enough for your needs. But you also don’t want to overpay for too much insurance. Otherwise, you could take on a huge monthly premium for insurance you’ll never actually use.

In all, how much insurance you actually needs comes down to your ability to pay. Since liability insurance is the most important coverage, we’ll start by discussing it. Then we’ll talk about collision and comprehensive coverage.

Liability Insurance: More is Usually Better

When it comes to liability insurance, there’s almost no such thing as too much. That’s because medical bills, in particular, can very quickly hit your insurance limits. $25,000 per person and $50,000 per accident can seem like a lot. But have you ever seen a hospital bill for even basic medical care? You can run up a $25,000 bill in about five minutes in the emergency room.

So what happens if you cause an accident and your insurance isn’t enough to cover the other party’s medical and property damage bills? You’re on the hook for the difference.

That can mean major bills to pay, garnished wages, or even filing for bankruptcy. It’s worth a few extra bucks a month to avoid these catastrophes.

With that said, in some cases, you can get away with less than the minimum amount of car insurance. Let’s look at the three most common scenarios.

The Judgment-Proof Person

There is one situation in which carrying very little liability insurance can make sense: if you’re judgment proof. This means that event if someone tries to sue you, there’s not much for them to take. If you have no assets and inexpensive belongings and a low-paying or no job, you may be considered judgment proof.

Someone could still take you to court for damages. And the court could technically lay down a judgment. But you wouldn’t be able to pay, so the other party would never collect.

College students and young adults just starting out often fall into this category. And they can typically get by with the state minimum for liability insurance. But be careful. If you make enough money to pay a bare minimum of living expenses and pay off a judgment, you could find your wages garnished.

In general, you should only carry the minimum levels of insurance for a short period of time. Consider this a period when you’re getting your feet under you financially. As soon as you get more financially stable, make room in your budget for a higher car insurance premium. The additional liability protection is worth it.

A Typical Middle-Class Family

CarInsurance.com sums up experts’ advice on liability coverage for the average middle-income individual or family. It says these families should have around 100/300/100 in coverage.

That’s twice as much as the judgment-proof person can get by with carrying. But it doesn’t cost anywhere near twice as much. In fact, you might be able to go from 50/100/50 coverage to 100/300/100 coverage for less than $100 per year, according to CarInsurance.com’s analysis.

That extra $100 per year is completely worth your while as you start building your career, savings, and other assets. If you have a lot of money in savings, you might even consider bumping your coverage to 250/500/100. That way, your assets and savings are protected, even in the case of a terrible accident. Again, increasing your coverage limits won’t increase your premiums by all that much.

A Wealthy Family or Individual

As you build wealth or pay down your expensive home, you technically have a couple of options. One option is to self-insure. Many states allow you to do this. You just have to certify that you have a certain amount of money in your bank account. In the case of an accident, you’d be responsible for directly paying for the damages.

But let’s be honest, if you’re a hefty saver or a big earner, paying an extra $15 or even $50 per month for car insurance is probably not that big a deal to your budget. And in this case, paying for a bigger insurance policy can make sense.

At this point you are, after all, the opposite of judgment proof. Individuals with a higher net worth are automatically more likely to be sued, according to this liability risk scorecard. So you should consider footing the bill for heftier liability insurance, and you might even extend your coverage with umbrella coverage.

Depending on which of these three categories you best fit into, you can customize your liability insurance coverage ranges.

Personal Injury Protection

Some states require additional insurance to cover the medical bills for yourself, your passengers, and other drivers in your home. This is essential in no-fault states, where your insurance company will pay for your bills before fault is determined in the accident.

It might seem like a good idea to increase your PIP coverage. After all, you don’t want to get stuck paying for tens of thousands in medical bills if you get into a car accident.

But if you have health insurance, you may not need additional PIP coverage. And if you live in a state that doesn’t require this coverage, you may not need PIP at all.

In the states that do require PIP, your car insurance will be considered your primary form of insurance after an accident. So if you have $10,000 in PIP, you can tap into that first. If your medical bills go up to $15,000, you can likely kick the remaining $5,000 to your health insurance company.

What if your state doesn’t require PIP? In this case, you can most likely go without it as long as you’re covered by health insurance.

It’s important to note that state laws vary on these issues. Check with your state’s insurance commissioner about the rules and regulations. Make sure that regardless of what happens, your medical bills will be covered in the event of an accident.

Bottom line: if you state required PIP, make sure to add at least the minimum to your car insurance policy. If it doesn’t, be sure your health insurer will cover any medical costs associated with a car accident.

Uninsured/Underinsured Motorist Coverage

Again, this is a type of insurance that is required in some states. That’s because according to the Insurance Information Institute, about 13 percent of motorists were driving uninsured. And even more drivers are likely to carry the state’s minimum level of insurance, which might actually leave them underinsured in a major accident.

If you’re in an accident with an uninsured driver, things can go one of two ways. In a no-fault state, according to Esurance, your insurance company will cover the costs of your medical bills. But this won’t cover other potential costs like lost wages or pain and suffering.

If the accident happens in a “tort” state–or one that requires fault to be assigned–you may have to sue for damages. This can take a while and be very stressful. And good luck getting any money if the person you’re suing is uninsured or underinsured simply because they have no money.

To avoid this situation, you might want to add at least basic uninsured/underinsured motorist coverage to your policy, especially if you live in a tort state. It can be a small additional cost that can make a big difference in the event of an accident with the wrong driver.

Coverage for Your Car

As we mentioned above, if you lease or still make payments on your car, the bank will likely require that you carry both collision and comprehensive insurance. But what if your car is paid off? Should you pay for this additional coverage?

That depends on a few factors, including:

  • How much the coverage costs. The cost of comprehensive and collision insurance depend largely on how much your car is worth. Older, lower-value cars might only cost a few bucks a month to insure like this. But newer cars can cost a pretty penny. So be sure to count the cost before you decide either way.
  • How much you need the vehicle. What if you own a car because it’s convenient, but you don’t really have to have a car? In this case, you probably don’t want to pay for comprehensive and collision coverage on your older, less expensive car. If you total it, you can just let it go and take some time to pay cash for a new beater for when you need a car.
  • How quickly you can replace the car. If you have a lot of money in savings and could replace your car no problem, you may not need comprehensive and collision coverage. But if you have no money in savings, paying the extra to ensure you could replace your car could be a good call.
  • How much the car is worth. Higher-value cars will cost more to insure, but they might also be more worth insuring. This depends on the cost of coverage and the value of the car. But, generally, a higher-value car is more likely to be worth the additional insurance, even if you could live without it or replace it easily.

The more you need car and the more valuable your vehicle, the more likely it is that you should have collision and comprehensive coverage. Be sure to price them out as you’re getting a new car insurance quote.

Replacement Cost and Gap Coverage

What if you’re not in a good enough financial position to replace your vehicle if it gets totaled? In this case, paying a few bucks a month for replacement cost coverage might be worth your while. You can at least check into the coverage to see how much it would cost you annually. It might be less than you’d think.

And if you’re in a situation where you know you’ll be upside down on your car loan, paying for gap coverage can be a good idea, too. Again, look at the actual costs of the coverage versus how much you’d pay if you totaled your car tomorrow before you decide.

Summing it Up

That was a ton of information! So before we wrap up, let’s just give a quick summary of how to figure out how much car insurance you need.

  1. Start with your state’s minimums. Your state’s minimum liability and personal injury protection insurance is the foundation on which you’ll build your policy. It’s most likely not enough coverage, but it’s where you should begin.
  2. If necessary, add in what your lender requires. If you are making payments on the car, be sure you have the coverage your lender requires.
  3. Bump up your liability coverage if at all possible. Unless you’re completely strapped for cash, aim to carry at least 100/300/100 liability insurance.
  4. Find out how PIP and uninsured/underinsured motorist coverage works in your state. Be sure you understand the laws, including whether your state is no-fault or tort, before you decide on this type of coverage. Also check with your health insurance company to see if you already have coverage for accident-related injuries.
  5. Consider your ability to replace your vehicle. If you have to have a vehicle and could not replace yours quickly, add collision and comprehensive coverage to your quote, even if you own the car outright.
  6. Look into additional options. Look, for instance, at things like gap insurance costs and replacement cost coverage. If these aren’t expensive and would be helpful, consider adding them to your policy.

Luckily, most online quote engines will let you tweak your insurance policy until it’s exactly what you want and what you can afford. But when it comes to affordability, prioritize liability insurance. If you can only afford decent liability coverage, put your money there first. Then when your budget opens up, consider adding additional coverage, as needed.

Before you shop for car insurance, check out this coverage calculator from insurance.com. It accounts for much of what we’ve talked about in this article and could give you an easy starting place when figuring out your insurance coverage.

Topics: Auto Insurance

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