At some point, anyone who has a vehicle is forced to make decisions regarding an auto insurance policy. And I’m willing to bet that as soon as the words “liability” and “comprehensive” start coming at you, it makes you wonder how much car insurance do I really need?
It’s a great question, and by asking it means you are trying to get the most out of your policy, without busting your budget. But you should also realize each person’s requirement for auto insurance is unique. It’s based on your financial circumstances and driving habits — but there are general guidelines to help point you in the right direction for purchasing a policy.
Auto insurance coverage can get a little overwhelming. And when you’re on the phone with your agent going line by line, or nailing down a policy quote through a website, you may be unsure how much you should purchase. Do you really need $300,000 in liability? Why should you add on comprehensive and collision? What do your state laws require? Let’s tackle these questions and more to find out what is worth purchasing, and what is optional for auto insurance.
Why purchasing the right auto insurance policy matters
Whether you’re changing up an existing policy or new to the auto insurance world altogether, it’s good to know why getting your policy right is so important.
For starters, auto insurance is a legal requirement in almost every state. Each state has its own laws and minimum coverage limits, but no matter where you live, there is some sort of minimum requirement you must adhere to. Driving without insurance is not only illegal, but it puts you at extreme financial risk if you’re involved in an accident — even if the accident is the other driver’s fault.
The other reason why it pays to get a policy right is the financial protection it offers. Being involved in an accident is costly, for either party. Not only are you dealing with potential damage to your vehicle, but there could be injuries and medical expenses that need attention, even funeral expenses in some cases. Having the right policy limits your financial exposure.
Meeting state minimum requirements
As mentioned, almost every state has minimums
you’re required to purchase. The only exception to this is New Hampshire, where if you demonstrate certain financial requirements then you are exempt from carrying auto insurance.
A licensed insurance agent will know exactly what is required for your state, but if you’re purchasing online then you can easily find this information too.
What you should understand is the minimums are just that — the bare minimum to drive legally. Only purchasing the minimum insurance may leave you financially vulnerable if you’re involved in an accident or your vehicle is damaged.
For most drivers, your state requires you to carry liability insurance
. Liability coverage refers to the protection provided if you are sued by a third party (related to an accident). It also pays for damages related to property damage or bodily injury if you are ruled at fault in an accident.
The liability limits are different depending on the state, but you’ll see it written as something such as 25/50/10. Each of these numbers represents a different liability limit.
The first number is the required bodily injury coverage per person, the second number is the required bodily injury liability coverage per accident. The third number is the property damage liability limit per accident.
So how much liability do you need if the state minimum isn’t adequate? The Insurance Information Institute (III) recommends a minimum of $300,000 although most financial experts recommend you increase your liability based on your net worth. If you do not have adequate liability limits, it opens you up to a potential lawsuit from a third party. You can also purchase a separate umbrella policy if you are concerned you need greater liability protection.
Personal injury protection
Some states require personal injury protection coverage or PIP for short. This pays for coverage towards your or your passenger’s medical bills and medical expenses, lost wages, and funeral expenses if you’re involved in an accident.
This coverage is required in states with no-fault laws, which means drivers are required to file a claim with their insurance company, no matter who is ruled at fault for an accident. But it is available to add to your policy for additional coverage.
If your state does not require PIP but you like the idea of help towards your (or your passengers) medical expenses, then you can select a medical payment-only option. This does not pay towards lost wages though.
Adding collision and comprehensive coverage
A prevalent question in the insurance world is whether or not to add collision and/or comprehensive coverage. While these are optional for some drivers, it’s critical to understand what these offer and whether or not you need them.
Comprehensive coverage is where your vehicle repairs are covered if it’s damaged as a result of theft, hitting an animal, or an act of nature - such as a tree falling on it or a big hailstorm. Think of it as the coverage for items out of your control.
Collision coverage is where your vehicle repairs are covered if it’s damaged as a result of colliding with another vehicle.
To answer your question of if you need comprehensive and collision, ask yourself if you’d rather save money on your premiums and pay more out of pocket if your vehicle may (or may not) get damaged from a collision or something out of your control.
If you’d rather avoid potential repair bills down the road, then adding these optional coverages is best. The average cost of these two is roughly $290 a year for collision, and $134 per year for comprehensive, according to the III.
What’s also important to understand is the deductible
associated with both of these two types of insurance. Each one will have its own deductible, but a $500 deductible for each is quite common. If you need to add these two to your policy but are concerned about budget, raising your deductible to $1,000 for each is a way to save. The higher you pay in deductibles, the lower your premiums.
But keep in mind a deductible is your out-of-pocket cost if you need a repair, so it’s wise to have the money set aside so you’re ready if you need to pay it.
Are comprehensive and collision required?
If you lease or finance a vehicle, then don’t be surprised if the lender requires you to add comprehensive and collision. You won’t be allowed to drive off the parking lot without showing proof of collision and comprehensive in some cases.
However, if you own your vehicle outright, then these two become optional and it’s up to you if you want to add it or not.
Gap insurance is somewhat similar to collision and comprehensive because it’s either an option or could be required by the lienholder.
If you’re involved in an accident and your vehicle is totaled, it’s likely your vehicle payoff will be lower than what you expect. It also means it may be lower than what you owe on the remainder of your car loan or lease. This is especially true if you drive a brand new car off the dealer lot and you immediately lose value thanks to depreciation.
This insurance pays the “gap” between the lower payoff amount and the amount you owe.
Add-on policy options
Once you have the basics down for your policy, it’s time to carefully choose the add-on options. Why is this important? Not only do certain options give you a greater level of peace of mind, but when the options are “wrapped” into your insurance rates it can make them much more affordable, versus purchasing separately.
Options are not generally used to enhance coverage, rather they are used to add more convenience features to your policy. But this can be a good thing, especially if you find yourself behind the windshield quite a bit.
What options are worth considering? There are quite a few, and the exact ones will vary from carrier to carrier. However, most carriers offer the following for you to add on for only a few dollars more.
- Roadside assistance: This popular feature provides help when your car is disabled or can’t be driven. Whether you need towing, extraction, fuel, or a battery jump, a good roadside assistance plan will get you on the road when you need it.
- Rental reimbursement: If you find yourself unable to use your vehicle because of a covered claim, such as a collision claim or comprehensive claim, then rental reimbursement coverage provides reimbursement for daily transportation. This can be either a rental car or other forms of transportation, such as bus passes. You have limits for how much you will be reimbursed each day, plus the number of consecutive days.
- Rideshare coverage: An increasingly common option is rideshare coverage. This is for those who use their vehicle for rideshare work, such as Uber or Lyft. This may help fill in any gaps in your policy and limit the amount of out-of-pocket costs you might incur if you’re involved in a claim while hired for rideshare.
- Pet coverage: If you ride with your furbaby in your vehicle then this extra protection may provide reimbursement of up to $1,000 if your pet is hurt (or killed) during a car accident.
- Accident forgiveness: You probably recognize this from commercials but this is another option where you pay a little extra with your premiums upfront to avoid increased premiums if you’re involved in an at-fault accident.
Again, each company is different when it comes to offerings, so be sure to ask which ones are available and choose the ones you feel add the most value to your policy.
The bottom line
Understanding the amount of coverage you need and the options available can get a little overwhelming. But thoroughly reviewing your policy regularly either online or with a licensed insurance agent is a financially smart move. Not only does it help you decide exactly how much car insurance you need now, but it keeps you informed on what coverages are making the most impact on your insurance rates.