How Much Car Insurance Do I Need?

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Getting your car insurance sorted can be quite stressful and time consuming with more than a few important decisions to make. Of course no one wants to pay too high of a premium but, on the other hand, it can be quite reassuring to feel safe and secure when on the road.

When deciding on how much car insurance do you need, you need to find that sweet spot that is the perfect fit for you.

This article explains the different coverages there are and how to choose the ones you need. However, it is important to note that auto insurance can be very personal and as such, if you’re not sure how much insurance you need, do speak to a professional.

Types of Car Insurance Coverage Explained

When you contact an insurance company or an agent regarding your auto insurance, you might hear a lot of confusing terms explaining the different coverages available.

To make sure you only sign for what you actually need, make sure you fully understand what each of them covers.

Here is a list of the most common auto insurance coverage with an explanation of what they’re all about.

Liability Coverage

Liability coverage is mandatory in most states, and it covers the damages done to other people and property should you cause an accident. It does not cover any damages done to you. Liability coverage is usually divided into two parts – property damage and bodily injury.

The property damage liability covers damage done to the property of other people, be it their car, house, or any other property you damaged. The bodily injury liability coverage includes medical bills people involved in the accident, lost wages, and other medical expenses.

To illustrate with an example, should you have an accident in which you are the party at fault, your liability coverage will cover the other party’s car repairs as well as any medical bills of people injured in the accident. In most cases, liability coverage will also cover any legal fees.

Insurance companies will let you choose the coverage limit you want to opt for with higher limits demanding higher premiums. Most states set a minimum liability coverage limit you need to take out however do think twice before trying to pinch pennies here; if the damage caused exceeds the limit it will have to come out, you guessed it, out of your own pocket.

Uninsured and Underinsured Motorist Coverage

Uninsured motorist coverage is mandatory in some states with underinsured coverage being mostly optional. Uninsured motorist coverage covers the costs of the damage that is done to you by uninsured motorists, including bodily injury and property damage.

Underinsured motorist coverage, on the other hand, covers the expenses that are above the insured motorist’s limits. In most cases, if you’re in an accident caused by another motorist, their liability coverage will cover your damage. Still, the Insurance Information Institute claims that 13% of U.S. drivers are not insured!

Comprehensive Coverage

Comprehensive coverage covers damage to your car that is not the result of an accident including theft, fire, vandalism, falling objects, natural disasters, animals, or riots (civil disturbance). This coverage also has a deductible which you can choose when buying the insurance.

The limit that the insurance will payout is usually the value of your car. Comprehensive coverage might be mandatory when leasing a car or if you have financing.

Collision Coverage

Collision coverage is usually optional, but if you lease a car or have financing, it most likely will be considered as a requirement. This coverage will pay for damage done to your car should you cause an accident, even if you drive into a tree or any other object.

Collision coverage will also have a deductible, which is the amount you have to pay to open a claim. When taking out an insurance policy, you will be able to choose the deductible amount. Keep in mind that the lower the deductible is, the higher your premium will be. The collision coverage also has a limit, which is usually the amount your car is worth.

Personal Injury Protection

Personal injury protection, or PIP for short, is mandatory in some states, but it’s not available everywhere. It covers your medical bills should you suffer injury in an accident, as well as cover for income loss, childcare or babysitter, and funeral expenses should the worst happen. PIP coverage does not depend on who caused the accident.

Medical Payments Coverage

Medical payment coverage is an optional add-on to your auto insurance, and it is available in the states that do not offer Personal injury protection. It covers your and your passengers’ medical bills, whether you caused an accident or not. Unlike PIP, medical payment coverage does not cover lost income or other expenses.

Rental Reimbursement Coverage

Rental reimbursement coverage is optional coverage which can be quite useful if you use your car on a daily bases and cannot commute any other way. It can help you avoid paying car-replacement rental fees while your car is in a shop after an accident.

When thinking of how much insurance to get, there are a number of different things to consider.

First, is your car; how expensive it is, what features does it have?

Then, it’s you; how experienced are you on the road, which areas do you drive in, and how much cash do you have in your emergency fund?

While it’s always a good idea to talk to an insurance agent, to get professional advice on what is best for you and your circumstances – there are three levels of auto insurance you need to take into consideration: basic, extended, and premium.

Basic Coverage

Basic coverage includes liability, collision, and comprehensive coverages, and even though they are not all mandatory, they are recommended.

When choosing a liability coverage limit, you should think very carefully about how much will you be able to pay yourself in case of an accident. There are usually three limits – bodily injury per person, bodily injury per accident, and property damage.

Collision coverage is not mandatory but is highly recommended, because even if the accident is not your fault, the other drivers’ insurance might not be enough to cover your damages. Unless of course, you are planning to bid farewell to your old car and have already saved up for a new one.

Comprehensive coverage might be a wise choice if you live in an area with a high risk of natural disasters or theft.

Extended Coverage

Extended coverage is like an extra layer of protection and includes Medical expenses coverage or PIP, Guaranteed Auto Protection (GAP), and Uninsured (UM) and Underinsured Motorists (UIM) coverage. If medical expenses coverage and PIP are not required in your state, you can skip it and save some money.

If you’re not taking out this type of coverage, do however make sure you have health insurance that covers accident-related medical bills and has some savings set aside for emergencies. If you bought your car with financing, GAP could be a great addition.

Should your car be written off due to an accident, this will not only cover the value of your car but any extra cash to pay out your debt. UM, and UIM might not be necessary if you already have collision and health insurance but they might be mandatory in some states.

Premium Coverage

Premium coverages include other add-ons that different insurance companies offer. These can include roadside assistance (which is great if you are often on remote roads), rental reimbursement (which you can skip if you can live without a car for few days), and custom equipment coverage (a must if your car has expensive custom features, like a custom paint job or stereo system).

How Much Bodily Injury Insurance Do I Need?

Most states will require you to have bodily injury liability insurance. When it comes to how much bodily injury liability you have, that depends on how many assets you have that you want to protect.

Before you decide how much coverage to get, you should add up the value of your:

  • Home(s)
  • Cars
  • Savings and investments

Make sure to subtract any debt – that way you’ll calculate your net worth. Your bodily injury cover should at least cover that so that you can protect your assets.

Most experts recommend at least $100,000 per person and $300,000 per accident – but make sure it is high enough to protect all your assets. If you don’t have enough insurance, you could face serious consequences like losing your house or anything else of value that you own.

Unless your assets are minimal, my advice is to speak to a professional to make sure the coverage you are getting is definitely enough for you.

How Much is the Average Car Insurance per Month?

Many factors come into play when it comes to car insurance costs – such as your age, marital status, where you live, and others – and the cost of premiums can vary.

If you’re wondering how much car insurance costs on average, check out my post, How much does car insurance cost?and that’ll give you a better idea.

The Dangers of Not Having Enough Car Insurance Coverage

If you don’t have the minimum coverage as mandated by your state, you might get fined.

If you only get the minimum coverage required by your state, you can still end up in trouble if you cause an accident and don’t have enough funds to fix your car, pay your medical bills, or cover damages exceeding your insurance limits.

  • You can be fined
  • Unplanned high expenses

How Much Auto Insurance Coverage is Enough?

So, how do you know you are getting enough coverage? You might be happy with a low quote you received from an insurance company, however, you need to make sure it offers you enough coverage so that your assets are not at risk. Here are a few things for you to consider:

  • Make sure you know your state’s minimum regulations. Check your state’s minimums. Most states will have minimum limits and minimum coverage set; make sure you are familiar with what they are to avoid paying hefty fines.
  • Make sure you evaluate your risk factors and financial situation. Ask yourself how well do you drive, how do you react to stressful situations, how confident are you in your car, how often and where do you drive, and finally and most importantly, how big is your emergency fund and what is the environment around you.

How to Get The Lowest Auto Insurance Rates

Finally – of course – you’ll want to make sure you don’t overpay for car insurance.

The good news is that there are many ways to reduce your insurance rates! Here are some great and safe tips on how to do just that. Do bear in mind that the lower cost is not always the better option, so don’t try to save cutting off any coverage that you might need or increasing your deductibles if you cannot afford them.

Think forward and consider situations that might happen.

  • Contact a few insurance companies. Get quotes from the best car insurance companies and compare them, to see which is the best fit for you. Remember that comparisons only work when you compare like with like.
  • Talk directly to the insurance company. You can skip independent agents and contact different insurance companies yourself if you have time for that, of course. This will help you save on commissions paid to agents.
  • Get discounts. Make sure you take advantage of all the discounts available. Do not be shy about asking for the full list of discounts offered by the insurance company (also – check out my list of cheap car insurance companies).
  • Drive as little as possible. Some companies offer pay per mile insurance, so less driving equals (much) lower rates.
  • Do you really need that sports car? Your insurance rate depends highly on the car you are driving. Insurance companies do pay attention to the risk of you getting in an accident, and sports cars have quite a bad reputation here.
  • Keep up your good driving habits. Most insurance companies offer good driver discounts and no claim discounts as well.
  • Use comparison sites. Comparison sites can help you understand which insurance companies offer the best premiums, so take the time to give them a ring to confirm and ask for further discounts as explained earlier.

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