Auto Insurance

Making Sure You Are Getting the Right Amount of Car Insurance

Have you ever really thought about your car insurance? Or maybe car insurance too expensive? Make sure you have the right coverage for your driving habits. Here's what to look for.

For many, car insurance is another monthly expense that you know you must have, but don’t really give much mind to. You may be like most other consumers, simply filing out a quote, buying whatever the company recommends, and begrudgingly pay for it every month. What you may not realize though is that by simply taking some time to ensure you are getting the right amount of coverage can end up saving you hundreds of dollars per year on your auto insurance. So how much car insurance do you need?

What to Look For

Car insurance is actually an umbrella term for multiple types of insurance that form a full auto policy. You have the liability part, uninsured motorist part and the first-party benefit part. The liability part is mandatory, and is meant to cover damage you cause in an accident. The uninsured motorist is sometimes mandatory, and meant for you to use if you get in an accident with an uninsured driver. The last part is usually optional, and meant to cover your own damage costs. Getting a fair priced policy is a matter of having the right amount of coverage for each type of insurance. So the next time you get an auto insurance quote, be sure to take time to analyze how much of each insurance type you are being recommended.

Your Company Doesn’t Always Know Best

If you are getting a quote from companies like Progressive and GEICO, you will never have to speak with an agent, and they will recommend you insurance based on your information. Essentially a computer is telling you how much insurance to have. While it may not necessarily be wrong, you should proceed with caution. There are different factors you need to consider about yourself, which the computer may not know, that can affect how much insurance you should have.

Liability Insurance

When it comes to bodily injury and property damage liability insurance, you should get an amount that reflects your net worth. You can get your net worth by subtracting all the money you currently own by the money you owe. So for example if you have $70,000 across all of your accounts, stocks and properties, but owe $40,000 in student loans, your net worth would be $30,000. Your liability insurance should match that amount. Essentially, it comes down to how likely you are to be sued. If you are a high net worth person, by going with low limits, you are opening yourself up to another driver suing against your assets to cover the costs of their accident. On the other hand, if your net worth is low or even negative, another driver doesn’t have much to sue against. They will be more likely to settle for whatever your insurance company offers them. The exception to this rule is if you are anticipating adding to your net worth in the future. If you have a high earning job for example, you are likely to have more net worth in a year or two. If that is the case, you should buy limits that reflect what your net worth may be in a year or two.

First Party Benefit Insurance

The optional part of car insurance is the trickiest to determine how much coverage to have. The first part to consider is collision and comprehensive insurance. Essentially, the two cover damage to your car, which another driver has not caused. If for example you cause a car accident, and do $4,000 worth of damage to your own car, you’ll have to pay the $4,000 out of pocket if you don't have collision insurance.

I usually say the rule for getting collision and comprehensive insurance is if your car is worth more than $2,000. That amount is what an average driver will pay in collision and comprehensive insurance over a 3 to 5 year period. If your car is worth less than that amount, the insurance is more expensive than the car, making it worthless. If however your car is valuable, it is more likely to have a costly accident. In one fell swoop, the $2,000 you may have saved is wiped out by having to pay $3,000 for repairs.

The second part is personal injury protection and/or medical payments coverage. These two are health insurance for car policies. 15 states make one or the other mandatory, while the rest do not. If you are in one of the states like California that do not make them mandatory, I say it is ok to forgo them, if and only if you have health insurance that will cover injuries sustained in a car accident. If you check your health plan and see that car accident injuries are covered, then PIP and MedPay are redundant. If however it explicitly states you won’t be covered in an accident, you should get one of the two coverages. Relying on someone else’s insurance to pay for your medical costs can be risky and a hassle.

Bottom Line

When you get car insurance, you need coverage that best reflects your situation. If you do not have many assets, and car not worth much, you can get less insurance. There is simply less to protect. If however you have a lot to lose, you will need higher limits.

Mark Fitzpatrick

Mark is a Senior Research Analyst for ValuePenguin focusing primarily on the insurance industry, primarily auto insurance. He previously worked in financial risk management at State Street Corporation.

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