How Much Car Insurance Do I Really Need?

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Key Takeaways:

  • Each state requires a minimum amount of car insurance for anyone who owns a vehicle. State minimum coverage typically includes specific levels of bodily liability coverage, personal property liability coverage, medical payments coverage, and uninsured or underinsured motorist coverage.
  • While state minimum coverage dictates the amount of car insurance you’re required to have, experts agree you should purchase insurance with higher limits in order to protect yourself.
  • How much car insurance you need can be determined based on factors like the car you drive, how much you owe on your vehicle, how often you drive, your net worth, and more.

How much car insurance you need is an important consideration, but you should also consider which types of car insurance you could benefit most from. For example, state minimum coverage usually requires a minimum amount of bodily liability coverage, personal property liability coverage, medical payments coverage, and uninsured or underinsured motorist coverage. However, you can buy additional types of car insurance including collision coverage, comprehensive car insurance, gap insurance, and more.

Before you invest in a car insurance policy, you’ll want to consider how much protection you need and the types of coverage that make sense for your lifestyle. Read on to learn why you need car insurance in the first place and the minimum amounts of coverage you should buy to have peace of mind.

Why You Need Car Insurance

According to the Insurance Information Institute (III), car insurance is a “contract between you and the insurance company that protects you against financial loss in the event of an accident or theft.” They also note that, in exchange for your auto insurance premiums, the insurance company “agrees to pay your losses as outlined in your policy.”

This definition for auto insurance very clearly underscores when you need this coverage in place if you own a car. Without car insurance, there would be no third party to pay for financial losses caused by an accident or theft. Instead, you would be financially on the hook for all potential losses, including your own as well as losses caused to others.

Additional reasons you need car insurance include:

  • Meeting state requirements: Individual states require you to have a minimum amount of car insurance in order to be a legal driver. If you are caught driving without at least the minimum amount of coverage required in your state, you could lose your license and/or face considerable fines.
  • Meeting lender requirements: If you take out an auto loan to purchase your vehicle, chances are excellent your lender will require you to have enough auto insurance to replace your car in the event of an accident. After all, the lender owns the vehicle until you pay off your loan, so they have a vested interest in protecting their asset.
  • Financial protection: Car insurance can kick in to pay for vehicle repairs, medical bills, and other costs associated with an accident or claim. Without car insurance, you could face a mountain of bills you could never afford to repay.

Ultimately, it’s easy to see why you need car insurance. Not only is it legally required when you own a vehicle, but you need to protect yourself from unforeseen financial losses, which could easily reach into hundreds of thousands of dollars or more in the event of a serious accident.

The problem is knowing how much car insurance you need, and which types of coverage you should prioritize as you build your policy.

How Much Liability Insurance Do I Need?

As you decide how much car insurance you should buy, you can start by looking up the minimum coverage requirements for the state you live in. From there, you can look at your specific situation to see how you can tweak those limits and add more coverage based on your needs. 

First off, you’ll want to look at the amount of liability insurance coverage your state requires. Liability insurance makes up the bulk of your state’s minimum coverage requirements, and this type of coverage kicks in to cover expenses when you are at fault in an accident.

When you look at state minimum insurance requirements, it’s easy to see how they could leave you in the lurch. In the state of Arizona, for example, drivers are required to purchase $25,000 per person and $50,000 per accident in bodily injury liability coverage, $15,000 in property damage liability coverage, and $25,000 per person and $50,000 per accident in both uninsured and underinsured motorist bodily injury coverage. 

We all know those car accidents can result in injuries that can cost six figures or more, and having just $50,000 per accident in bodily injury liability coverage is not nearly enough.

Generally speaking, experts suggest setting your liability limits high enough to cover even the worst-case scenario if you can afford it. At the minimum, you should strive to purchase a policy with at least $100,000 per person and $300,000 per accident in bodily injury liability, along with $100,000 per accident in property damage liability coverage.

Additional Types of Auto Coverage to Consider

In addition to sufficiently protecting yourself with liability insurance, there are other types of auto insurance coverage you will want to invest in. 

For starters, collision coverage can be utilized to repair your car in the event of an accident if you’re at fault. This coverage will likely be required by your lender if you have an auto loan, but you can also purchase collision coverage if you own your car outright.

Separately, comprehensive coverage can kick in to repair your car if it is damaged for reasons outside of an accident with another car. For example, comprehensive coverage can pay for damages if you hit an animal on the road with your car or your vehicle is damaged by hail or vandalism. Once again, comprehensive coverage will likely be required by your lender if you finance your vehicle.

Personal injury protection (PIP) is another type of auto insurance that could be required by your state. This type of coverage can kick in to pay medical bills regardless of who is at fault in an accident, but you may not need to buy additional PIP coverage if you have a sufficient amount of health insurance and disability insurance coverage.

Uninsured/underinsured motorist coverage is another type of insurance that may be required within your state. This type of insurance is inexpensive to add to your policy if it’s not required, but you can also increase the limits for this coverage to an adequate level. With so many uninsured and underinsured drivers on the road, you should strive to purchase uninsured/underinsured motorist coverage with limits of at least $100,000 per person and $300,000 per accident.

Gap insurance is another type of car insurance you should consider if you owe a considerable amount of money on your vehicle. With this type of protection in place, you’ll have coverage to fill in the “gap” if your car is totaled and you owe more than it’s worth.

Finally, umbrella insurance is another type of insurance coverage recommended to drivers who want to protect their assets. According to the Insurance Information Institute (III), an umbrella insurance policy can cost as little as $200 to $300 per year for $1 million dollars in coverage.

With umbrella insurance in place, you’ll have additional liability protection you can access if the limits on your car insurance policy are exhausted after a claim. 

What Happens If I Have Insufficient Car Insurance?

A suitable car insurance policy may be required by the state you live in, but the amount of car insurance you have is just as important. After all, other people who are in an accident with you may be able to sue you for losses that exceed your car insurance policy’s limits. By and large, this is why experts recommend having liability coverage limits that exceed your net worth instead of buying the cheapest car insurance policy you can find.

Also, note that having only state minimum coverage means you won’t have any collision or comprehensive coverage in place. This means that, if you’re in a wreck, your car is stolen, or your car is totaled due to a collision with an animal, hail, or vandalism, you won’t have any financial protection at all.

How to Decide How Much Car Insurance You Need

How much car insurance you need really depends on a number of specific factors, including: 

  • Your personal assets
  • State minimum requirements
  • Whether you own your car outright or have an auto loan

To figure out how much car insurance you should buy, take the following steps. 

Step 1: Figure out your net worth

To protect yourself against the perils of driving, State Farm suggests a simple formula you can use to ensure you have enough liability coverage. For starters, they suggest adding up the value of your home, cars, savings, and investments. From there, you can subtract your debts to reach a simple estimate of your net worth

If your total net worth is $220,000, they explain, you could consider $250,000 in liability insurance for injuries per accident. You could also bump up your coverage even more for additional protection, or purchase other types of insurance that can fill in the gaps.

Generally speaking, most experts suggest having a minimum of at least $100,000 per person and $300,000 per accident in bodily injury liability, along with $100,000 per accident in property damage liability coverage.

Step 2: Figure out your state’s minimum auto insurance requirements

In the meantime, you should also check your state’s minimum coverage requirements so you know how much protection you’re legally required to buy. You can easily find this information on your state’s Bureau of Motor Vehicles (BMV) website.

Step 3: Find out your lender’s requirements

Finally, find out what your lender requires in terms of car insurance coverage. Chances are, they will require you to have collision and comprehensive coverage in place that is sufficient to replace your car in the event of a total loss.

If you’re “upside-down” on your car loan, or you owe more than your car is worth, you may also want to spring for gap insurance coverage. This type of coverage can pay off your car loan if you’re in an accident while your car is totaled and you owe more than your car’s value on your loan.

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The Bottom Line

How much car insurance coverage to buy is a personal decision, but it’s one that should not be taken lightly. After all, a lack of sufficient coverage could leave you in a financial mess that lasts years or even decades if you’re in an accident.

At the end of the day, we suggest shopping around for car insurance with at least three or four providers and purchasing the highest coverage limits you can reasonably afford. When it comes to auto insurance, you’ll never wish you had less coverage, but you will wish you had more insurance in place if you have to use it.

What is uninsured/underinsured motorist coverage?

Uninsured and underinsured motorist coverage is a type of auto insurance that can pay for medical expenses when you’re in an accident with an at-fault driver who has no auto insurance coverage or insufficient limits. This type of coverage may be part of the state minimum coverage requirements where you live, so make sure to check.

What is state minimum auto insurance coverage?

All states require some level of minimum auto insurance coverage in order to own a vehicle. However, state minimum coverage types and amounts vary. Most states require a minimum level of liability coverage, for example, yet many also have a medical payments component or a personal injury protection (PIP) component.

Gap insurance kicks in to cover the “gap” when your car is totaled and you owe more on your loan than it’s worth. Gap insurance is typically optional, but you’ll be glad you have it if you have to use it.

How can I save money on car insurance?

There are many ways to save money on car insurance, including taking the time to get quotes from at least three or four different auto insurance companies. You can also raise the deductible required to access your coverage, and you check to see which auto insurance discounts you’re eligible for.



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