How Much Car Insurance Do I Need?

How Much Car Insurance Do I Need?

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Knowing how much car insurance you should have boils down to understanding your economic circumstances and how the different types of protection work together. If you own a car, buying car insurance is inevitable, so it is really important you are getting the right amount.

Table of Contents

How Much Car Insurance to Get by Coverage

Car insurance is made of several protections that form a complete auto policy. Ensuring you are properly insured is a matter of having the right amount of coverage for the different types.

Car Insurance Type

You Should Have If…Get High Limits if…Get Low Limits if…

Bodily Injury Liability

MandatedYou have many assets in your nameYou don't have many assets

Property Damage Liability

MandatedYou have many assets in your nameYou don't have many assets

Uninsured Motorist

Mandated/Don't have PIP or Collision insuranceYou have neither collision, comprehensive or PIPYou have PIP and/or Collision

Collision and Comprehensive

Your car is worth more than $2,000N/AN/A

Person Injury Protection/Medical Payments

Mandated or do not have health insuranceYou don't have health insuranceYou have health insurance but want economic benefits of PIP/MedPay

How Much Liability Car Insurance Should You Have?

Bodily injury liability and property damage liability are mandated in just about every state, but the amount you carry should be equal to your net worth (more on bodily injury here, and property damage here). To calculate your net worth, you need to add up all of your assets and subtract them by your debts. So if you have $80,000 between all your bank accounts and properties, but a $40,000 student loan, your net worth would be $40,000. Your liability insurance, namely your BI, should reflect that amount. Property damage claims usually don't cost more than a few thousands dollars let alone $40,000, but medical expenses can increase quickly. If your net worth is lower than the minimum amount required by your state, you may opt for the minimum.

An exception to this rule is if you have a high-earning job, but still a low amount of assets. Your future earnings may be targeted as a means of compensating another driver for their costs. You should account for what your net worth may be in one or two years when getting your policy.

The cost of increasing BI and PD limits is generally inexpensive. We found going from 25/50 limits to 50/100, a 100% increase in coverage, cost only 34% more. The difference is even less going from 50/100 to 100/300, where the costs are only 14% greater.

How Much Uninsured Motorist Insurance Do You Need?

Nationally about 1 in 7 drivers is uninsured, so most policies should have Uninsured Motorist (UIM) insurance limits equal to their BI and PD. Currently, about half of the states make UIM mandatory, but it can be purchased in the states that do not require it as well. While getting into an accident with an uninsured driver is low, if it does happen, it can prove to be costly. If your policy only has BI and PD insurance, you won't have any means of paying for any of your own medical or property costs.

UIM is fairly inexpensive compared to other types of coverage. Most drivers should be able to add the equivalent to their liability limits for less than $50 per year. If you have collision, comprehensive and/or personal injury protection insurance on your policy, it will be okay to opt out UIM (so long as it is not mandated). With those coverages, you will be able to take care of the medical and damage costs if you get into an accident with an uninsured driver.

Should You Get Collision and Comprehensive Insurance?

Collision and comprehensive are optional in every state, yet most drivers should have both on their policy, especially if your car is worth more than $2,000. While opting out of collision insurance can save you several hundred dollars per year if a car suffers $10,000 worth of damage, you will actually end up losing money since the $10,000 is more that what you would have saved in the time. Furthermore, collision claims are much more frequent than claims from other types of auto insurance. According to the Insurance Information Institute, about 6% of drivers filed a collision claim in 2015, with the average claim being worth $3,350. While 6% may seem low, that is by far the most of any other type of car insurance.

Adding collision and comprehensive insurance to your policy may double your payments. A good way to control the cost of collision and comprehensive insurance is choosing the right deductible. Both types of coverage do not have limits like the others, but drivers may choose a deductible usually between $50 and $2,000. A $50 deductible will cause your premiums to be fairly high, while a $2,000 deductible will make them much lower. You will want to select a deductible amount you would be comfortable paying in the event of an accident, relative to how much it costs you monthly. If you want a high deductible to further reduce monthly premiums, we recommend having an emergency fund set aside for paying the deductible.

Should You Buy Personal Injury Protection and/or Medical Payments Insurance?

If you come from a state that does not make either coverage mandatory, it is ok to opt out of either coverage so long as you have health insurance that covers car accidents. PIP and MedPay can be similar to health insurance you buy with your auto policy. If your health insurance will cover injuries you sustain in a car accident, then you can do without those coverages. It is worth noting, however, that both MedPay and PIP pay for funeral costs, and PIP covers any earnings you may lose due to your injuries. The economic benefits of these coverages are usually not found in a standard health plan. If you can afford either coverage, they may be worth having just for those reasons.

Can I Just Get the State Minimum Car Insurance?

Each state sets the minimum amount of car insurance drivers need to legally drive. To see how much is required in your state, see our article here. We suggest that most drivers should opt for more than the minimum amount required by the state. Often times it will not be enough to cover damages or any liability you sustain in a car accident. The only time it will be okay to have the minimum required car insurance is if all three apply:

  • You have low assets,
  • You have a low value car, and
  • You have health insurance that covers car accidents

If you do not have many assets, there is less available for another driver to sue against. If that is the case, the other driver will be more likely to accept whatever amount your insurance company is offering them, In addition to have low assets, if your car is not valuable, you may be able to get away with the minimum amount of car insurance because you do not need to carry collision and/or comprehensive insurance. A car of low value, under $2,000, doesn't really need to be insured, since many times the cost of repairs can be more expensive than the car itself. Lastly, it is imperative you have health insurance that can cover you in an accident. Injuries stemming from a car crash are expensive, and you will want to be sure your health insurance company will cover your costs. Certain health policies may not cover injuries sustained in a car accident. If that is the case, you will need to purchase some form of health insurance with your auto policy, either personal injury protection or medical payments coverage. Currently, only 15 states make having one of those coverages mandatory.

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

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.