Determining how much car insurance you need can be tricky. You’ll need to know how much coverage the law requires you to have while ensuring you have adequate coverage to protect your assets and yourself. You also need to find the right plan to fit your budget.
When looking at how much car insurance coverage you need, it’s best to do your research well ahead of when you need the coverage. You should also keep up with the latest rules, regulations, and parameters of the industry. Seeking advice and quotes from only one agent could result in you purchasing more coverage than you need, and possibly at a higher rate than the competition.
Why Do I Need Car Insurance?
Car insurance is designed to protect you, your assets, others, and property in the event of a collision, theft, or natural disaster. You pay a little each month for the comfort of knowing that you won't have to pay a large sum in the event of a catastrophe. For a more detailed explanation, check our guide on how car insurance works.
Laws vary from state to state regarding how much and what types of car insurance you need to carry. Most states require vehicle owners to carry at least liability insurance, which pays for minor injuries and damage in the event of a collision.
Some state laws dictate that if you're in an accident and caught driving without insurance, you won't be eligible to receive financial compensation for damage to your vehicle. Additionally, you can get a ticket, receive a court summons, and face a driver’s license suspension in some jurisdictions.
Insurance can help you protect your assets. In the event of a collision, depending on the circumstances, you may need to pay for damages to your own vehicle, as well as any other involved vehicles, property, and people. Purchasing adequate insurance coverage can protect your assets and lay the burden for payment on the insurance company, saving you from writing a big check.
When you lease or purchase a vehicle, you may need to show proof of insurance before getting the keys from the dealer. If you are using a car loan to purchase your vehicle, the lender may have specific requirements for how much and what types of insurance you must carry on the car. By requiring an insurance policy, the lender is protecting your car, which, under the terms of your loan, is legally considered their asset until you pay off the loan and receive full ownership of the vehicle. Failing to secure the right coverage may violate the terms of the loan.
Having car insurance on a car that you owe money on is simply a smart move. If you don’t have insurance, or you don’t have enough insurance and the car is totaled, you’ll be stuck paying for a car you can no longer drive. Insurance can help you pay off your loan and purchase a new vehicle.
What Happens if I Don’t Have Car Insurance?
If you're found driving a car that is not properly insured, there can be many penalties, both criminal and financial, in addition to the loss of personal assets. If you lend your uninsured vehicle to someone, you're putting yourself at risk, in addition to the person who borrowed your car.
If a police officer stops you for a traffic violation and discovers that you're driving without car insurance, they may write you a ticket for failing to secure the required level of car insurance. Depending on state law and local policies, that officer may be required to tow your car from the scene. Often, this type of penalty includes a court appearance where you may need to enter a plea.
When registering a vehicle in some states, you can give a large cash payment or proof of bond or certificate of deposit to get out of showing proof of insurance. These payments are generally tens of thousands of dollars.
Balancing Car Insurance Rates With Your Risk
Numerous factors go into determining your car insurance rate. In addition to the type and amount of coverage, agents consider your credit score, age, driving record, and sex, as well as historic risk factors associated with drivers. If you are considered too much of a risk, some insurance companies may not sell you a policy.
The state you live in also affects the cost of car insurance. The Insurance Information Institute says that New Jersey, New York, Louisiana, and Michigan have the costliest car insurance rates while Vermont, Indiana, Wyoming, Wisconsin, and North Carolina have the least expensive rates.
According to CarInsurance.com, 38 states require at-fault drivers in a collision to pay for the victim’s medical expenses and possibly other damages, including loss of wages and compensation for pain and suffering. In this scenario, you could be on the hook for millions of dollars in medical expenses plus additional costs if the injuries are severe enough. If you don't have enough coverage, you may be forced to sell your assets or file for bankruptcy if the accident-related expenses are high enough.
Twelve states have no-fault automotive insurance laws. In the event of a collision in these states, your insurance company does not recognize that any driver is at fault. This means that drivers and vehicle owners are protected from lawsuits. It also means that you’ll likely need to purchase a Personal Injury Protection policy, which covers the driver and passengers in your vehicle should you be involved in a crash. If you're injured, you file a claim against that policy rather than against the other driver’s policy.
If you buy an insurance policy that does not have enough coverage, you may be on the line for any additional damages above your coverage level. For example, if the damages in an accident total $100,000, but you only have $20,000 worth of coverage, you would be responsible for the additional $80,000. To get this money, courts can order that defendants sell personal assets and have their wages garnished.
Having too much coverage is problematic as well. You only need a policy that covers the value of what you own. For instance, if you do not own a home or have any savings, there is no point in paying for a policy that would cover the value of those assets. If your $35,000 car is your only asset, and you owe no money on a loan for the vehicle, you should buy a policy that's just inclusive enough to cover that asset. If you over-cover yourself, you will overpay as well.
What’s the Minimum Car Insurance I Need?
To find out the minimum auto insurance coverage you need, you first need to determine the value of your assets, including debt. Then you need to find out what your state requires for coverage and decide how often you will drive your car. Some insurance companies offer discounts for policyholders who do not use their vehicle to commute or who put minimal miles on the car each year. Your profession and membership to select associations can also make you eligible for a discount.
Guide to Common State Coverage Requirements
There are three basic types of auto insurance: liability, comprehensive, and collision coverage. There are additional types of coverage that can be helpful if you have a car loan, need to rent a car due to an accident, require roadside assistance, have aftermarket parts on your vehicle, or just want the extra comfort that additional liability insurance can give you as part of an umbrella policy.
Most states require between $15,000 and $25,000 in bodily injury liability per person, $30,000 to $100,000 in bodily injury liability per accident, and $5,000 to $25,000 in property damage liability. Some require additional coverage such as uninsured motorist and medical payment coverage.
Liability insurance covers costs related to a crash that you're responsible for. It covers the driver and passengers in the vehicle that you're involved in an accident with, but not you or your passengers. This type of policy can be subdivided into bodily injury liability and property damage liability.
You'll often find these policies written with three numbers indicating the amount of coverage you have. For example, a policy that lists 100/200/50 liability coverage covers up to $100,000 for injuries to a person, $200,000 for injuries per accident, and $50,000 in property damage per accident.
Some policies may list the total amount rather than a broken-down amount. Make sure the coverage amounts are identified separately in the fine print before you sign on the line.
Bodily Injury Liability
If you are at fault for an accident and someone sustains injuries, you're responsible for the cost of their medical care. This can include long-term care. Bodily injury liability policies do not cover the cost of medical care for anyone in your vehicle should they sustain an injury during an accident, only people in the other vehicle or vehicles.
Property Damage Liability
In the event of a crash, you may have to pay to repair a vehicle, cover the cost of a totaled car, or pay to repair damaged landscaping, buildings, or other structures affected by your accident.
This insurance covers the costs of property damage associated with damage done to other people’s property and will not cover any damage done to your vehicle or property.
Collision insurance covers the damage to property that liability coverage doesn't cover. If you're involved in an accident and need to repair or replace your vehicle, collision coverage pays for those expenses.
As with liability coverage, there are limits to contend with. You choose how high you want the limit, and you are responsible for anything less than that. If you choose a $1,000 limit, you are responsible for all costs under $1,000. This is known as your deductible. If you're in an accident and it costs $12,000 to repair your car, you will pay $1,000 and your insurance company will pay $11,000.
Your collision insurance rate depends on how high your deductible is. The higher the deductible, the less your monthly cost will be because you are assuming more risk. Keep in mind, however, that in the event of a collision, you’ll have to come up with the cash to cover your deductible. Make sure the deductible isn't too high for you to do that. For more detail, we created a complete guide to collision insurance.
Personal Injury Protection (PIP)
No-fault states often require car owners to carry personal injury insurance. PIP covers medical costs for you and your passengers in the event of a collision. This insurance coverage may also cover income loss if your injuries are severe enough to cause you to miss work.
This protection may not cover all your medical expenses, but it will cover up to your limit. This type of insurance can work in place of traditional health insurance during the aftermath of an accident. It can also serve as payment of your health insurance deductible if you have a traditional health insurance plan.
PIP can also cover funeral expenses and costs associated with hiring personnel to cover your inability to work if you are self-employed.
PIP is not available in all states.
Medical expense coverage works like PIP and can be used for a claim no matter who is at fault during a collision. However, it does not cover lost wages and generally has a low threshold. Like PIP, it can be used to cover your regular health insurance deductible.
Uninsured and Underinsured Motorist Coverage
If you're the victim of a hit-and-run or you collide with someone who does not have insurance or has less insurance than the state’s minimum mandated amount, uninsured and underinsured motorist coverage helps with costs associated with the accident. Many states require this type of insurance.
Lender Coverage Requirements
If you're financing your vehicle purchase, your lender may require you to purchase a certain level of auto insurance and keep that level for the duration of your loan. These terms are spelled out in your lending agreement and available for you to see before you sign on the line for your new vehicle.
If your car is damaged outside of a collision, you can claim the damage under a comprehensive insurance plan. Damage caused by inclement weather, such as hail, is also covered under a comprehensive plan. As with other insurance coverages, there are limits to the amount covered, so you’ll want to choose a plan carefully and consider the added cost to your overall insurance expenses.
We created a complete guide to comprehensive insurance to give you more detail and help you figure out of this coverage is right for you.
From the moment you drive your new car off the dealer lot, your new vehicle begins to depreciate. If you finance your new-car purchase, the gap between the amount you’ll pay for your car over the next three, four, five, or even six years and your car’s actual value is continually widening. This means that if your car is totaled in an accident during the life of your loan, you'll have to pay your deductible plus the difference between the amount of money the insurance company gives you and the amount left to pay on your loan.
Gap insurance bridges the divide, paying the amount left on your loan in the event of a total loss. For more information on gap insurance, read our gap insurance guide.
Your insurance rates can rise if you're at fault for a car accident. If you haven’t been at fault for an accident for at least a year, you may be eligible for a discount on your insurance policy. Forgiveness coverage works like these discounts, offering forgiveness if you cause an accident within the time frame spelled out in your policy. This essentially wipes your record clean and enables coverage cost escalation relief. Generally, you’re only able to use this coverage once.
With a glass coverage policy, you can replace your broken or cracked window at no cost. These types of policies have no deductible. Some states allow this type of coverage in your comprehensive coverage plan, while in others, you’ll need a separate policy.
If you don't have glass coverage and a window repair becomes necessary, you may be able to file a claim under your comprehensive coverage policy, but you'll likely have to meet a deductible before the insurance company pays out.
If you’ve customized your vehicle with aftermarket parts, you’ll want to consider custom-equipment coverage. Most traditional comprehensive coverage policies only cover original equipment. A custom-equipment policy can help with the expense of repairing custom parts that are damaged in an accident.
The long list of covered items includes everything from upgraded stereo equipment to winches to custom paint jobs and decals. These policies generally have a low maximum limit compared to traditional coverage policies.
Some insurance companies offer a pay-per-mile plan, which allows you to pay for your insurance based on how many miles you drive each year. If you don't put many miles on your car each year, you could save a lot of money. Most of these plans have a base rate that policyholders pay, plus a fee that's determined by the number of miles you drive. Mileage is reported to the insurance company via a device that plugs into your car and tracks your driving.
This coverage often includes collision and comprehensive policies and can include additional coverage as well.
If your vehicle needs a tow, whether it’s been in an accident or not, you can use roadside assistance coverage to pay for it. Companies like AAA offer similar roadside assistance services.
Many new vehicles come with warranties that include years of roadside assistance. Those types of warranties often have strict limits, so do your research to see if you'll need to supplement that coverage with an additional policy or by subscribing to a service.
Umbrella insurance provides additional liability coverage. It is a supplemental policy that goes into effect after you've exhausted other liability policies. It can be helpful if you're involved in a lawsuit as the result of an accident. These policies are usually only available for a million dollars or more in coverage and most benefit drivers with many assets.
Transportation Expense Coverage
Some policies cover the cost of a rental car or other transportation when your car is undrivable because of an accident. Also called rental reimbursement coverage, this type of policy often comes with a limit as to how much the insurance company will pay per day.
Original Equipment Coverage
When you get into an accident and your vehicle needs repairs, repair shops will often fix your car with aftermarket parts that function nearly the same as your vehicle’s original equipment. This is usually cheaper than using parts from the original manufacturer. Many of these parts are at least as good as the vehicle’s original equipment, if not better.
If your vehicle needs repairs as the result of a collision, original equipment coverage guarantees that it will be repaired with parts from the vehicle’s original manufacturer.