How Much Auto Insurance Coverage Do You Need?
Insurance providers and agents are in the business of convincing consumers that they need absolutely every form of available coverage. This strategy is great for their revenues, but not necessarily for your pocketbook.
At the same time, scaling back and carrying only bare-bones forms of auto insurance is fraught with risk. Many jurisdictions only require drivers to carry liability insurance, which will pay for damages and injuries to other people but not to your vehicle or to yourself.
So, where is the right balance? This guide will examine the numerous factors that influence the answer to that question, which will be a little different for everyone. In it, we will proceed through the major types of auto insurance, looking at when you need them, when you can skip them, and how much of each type of protection you should consider.
This type of coverage protects you from liability for property damage and injuries to other people that you caused by being at fault in an accident. In most states, it is mandatory, and in many jurisdictions, it is the only form of auto insurance you are absolutely required to carry.
So, how much should you get? One rule of thumb suggests that you always carry at least $500,000 in liability insurance. Another breakdown looks at the various coverage limits attached to the different branches of your liability coverage, which extend to property and bodily harm, respectively.
According to the latter model, you should strongly consider carrying limits of at least 100/300/50. This is insurance industry jargon for a policy that provides a minimum of:
- $100,000 for bodily injuries to one other person
- $300,000 for bodily injuries to multiple other people
- $50,000 in property damages
As a general rule of thumb: the more assets you have and the higher your net worth, the more liability protection you should consider. This approach provides you with the best and most complete protection.
Uninsured and underinsured motorist insurance
In some states, you are required to carry a policy add-on that protects you if you are involved in an accident with an uninsured motorist, or a motorist with minimal liability coverage that will not suffice to cover all your expenses. These types of insurance are optional in other jurisdictions, but are still generally recommended.
Here, the rule of thumb is pretty simple: carry uninsured and underinsured motorist protections that cover you to at least the same level as your liability coverage.
Medical payments and personal injury protection (PIP) coverage
As with uninsured/underinsured motorist protection, medical payments coverage and PIP coverage are optional in some states and required in others. If you live in a jurisdiction where they are optional and you are already well-protected by your existing health insurance, you can safely forego them, with some caveats.
These caveats mainly apply to PIP coverage, which extends medical payments coverage to expenses like lost wages and the need to hire help to assist you as you recover from injuries. PIP coverage is particularly important if you are self-employed and do not already have lost income protections built into your existing insurance plan.
You should also consider these protections if you do not have access to social safety net benefits for some reason or another. They are both relatively inexpensive, and the peace of mind they provide are worth it if you are exposed to these risks.
Comprehensive and collision insurance
Here, the rule of thumb is to consider these optional forms of coverage if your vehicle is worth at least $3,000. If it’s worth less than that, you aren’t likely to extract value for your money even if you have to make a claim.
As a way to control costs, personal finance experts usually recommend that you choose higher deductibles for these forms of auto insurance. This is because the annual savings you will generate by opting for a higher deductible are usually more than enough to cover the deductible itself if you ever need to make a claim.
The rule of thumb: examine your finances, consider the maximum amount you could afford to pay out of pocket to cover the deductible, then set your deductible at or around that figure.
Optional forms of insurance
Let’s wrap this up with a look at prevailing wisdom as it applies to optional and specialized forms of auto insurance:
- Rental car reimbursement coverage: Experts generally recommend declining any offers you may get requiring you to pay extra for this type of coverage, since it usually comes with relatively low daily limits that don’t work out in your advantage over the lifetime of a typical policy.
- Roadside assistance coverage: The American Automobile Association (AAA) offers roadside assistance packages that are usually cheaper than the ones offered by insurers. Many insurance companies significantly restrict the maximum amount you are eligible to claim, so the rule of thumb here is to say “no, thank you” unless the coverage is free or costs less than about $10 per year.
- Gimmicky policy features: If you’re offered a gimmick like “vanishing deductibles” or “accident forgiveness,” proceed with caution if they come at an additional cost. Personal finance experts generally recommend getting covered under these types of protections only if they are bundled in with your policy at no additional charge, because they aren’t likely to deliver value otherwise.
- Auto insurance is a vitally important part of your personal financial protection plan
- Carry at least $500,000 in liability insurance, or apply the “100/300/50” rule
- Consider medical payments coverage if your existing health insurance leaves you exposed to risks
- PIP coverage is most important for self-employed people seeking to protect themselves from potential income losses
- If your car is worth less than $3,000, you probably don’t need comprehensive or collision insurance
- In most cases, you’ll want to say no to optional forms of coverage like rental car reimbursement, roadside assistance, and policy gimmicks
- Uninsured and underinsured motorist protection is worth considering even if it is not mandatory where you live, because so many U.S. drivers operate vehicles without adequate coverage