How Much Car Insurance Do You Really Need?

Car insurance coverage is often a rushed or glossed-over decision, but one that could have enormous consequences in the future. If you are getting a policy for the first time or if it's time for your yearly insurance coverage check-up (always a good idea), it helps to consider piece-by-piece the best coverage for your situation and wants.

First, you need to know your state's minimum car insurance requirements and use that as a baseline. This information can be found on your state’s Department of Motor Vehicles website. You may actually find that this level of coverage is enough for your needs, but that decisions should only come after you examine the considerations below.

Break Down the Components
What is commonly called “car insurance” is actually made up of several different types of coverage.

Insurance That Covers Others

• Bodily Injury Liability: Medical bills are paid for the other party when you are at fault in an accident. It is usually expressed in terms of two different coverage levels: per person and per accident.
• Property Damage Liability: If you are at fault in an accident, it pays for damage done to the other vehicle

The amount of coverage provided by these components of car insurance is often expressed as three numbers separated by slashes. For example, your state minimum for liability coverage may be a 20/40/15 policy. This would give you $20,000 worth of Bodily Injury coverage in per person, $40,000 of Bodily Injury per accident and $15,000 for Property Damage. But is that enough?

The general response among insurance industry experts is that it is not. The guidelines put forth by these analysts suggest that a better amount of coverage to have would 100/300/50. Why? These figures are more in line with what experience shows the expenses tend to be for major accidents. Some experts even recommend going as high as $500,000 for the total per-accident bodily injury coverage.

Your assets are another important factor here. If your liability insurance doesn't cover the total value of your home, vehicles, investment accounts and other assets, you run the risk of having your property seized as part of a lawsuit. You may think you're off the hook if you live in a "no-fault" insurance state, but remember that states can choose to allow lawsuits in certain cases. In other words, there isn't really a true "no-fault" state.

Insurance That Covers Those in Your Vehicle

• Personal Injury Protection: Covers medical charges for you and your passengers. It may also cover time lost from work due to an accident.
• Uninsured or Underinsured Motorist: Goes toward costs associated with being struck by someone who has little or no insurance.
• Collision: Puts money toward repairs made to your car after an accident.
• Comprehensive: Covers theft or damage to your car in non-accident situations.

If you already have medical insurance, it may not make a lot of sense to also load up on the Personal Injury Protection. However, if you don't have existing health insurance, it probably makes sense to get at least $10,000 worth of Personal Injury Protection.

Experts recommend that for Uninsured or Underinsured coverage, you match what you have going for Bodily Injury Liability policy. In other words, $100,000 for one person and $300,000 total are the recommended levels.

For Collision coverage, the key is the amount you feel you can pay out-of-pocket to make repairs to your car in the event of an accident. This may sound counter-intuitive since the whole idea of insurance is getting help to pay your unexpected expenses, but remember that deductibles are involved with Collision insurance. The deductible is what you pay on your own before the insurance starts to contribute. The higher the deductible you agree to pay in the event of an accident, the lower your monthly premium. An oft-recommended deductible to aim for is $1,000. The amount you set aside for a potential deductible payment can be a part of your emergency savings plan. If you drive a car of low monetary value, it may make sense to drop Collision coverage if you will end up paying more in premiums after a few years than the car is actually worth.

There is also some deductible/premium counterbalancing to do with the Comprehensive coverage portion of your insurance. However, you likely want your deductible to be much lower for your Comprehensive coverage. After all, if your vehicle gets some hail damage that will cost $600 to fix and your Comprehensive deductible is $1,000, then you aren’t really getting the benefit of paying for the coverage. If you want your Comprehensive to cover this kind of less severe damage too, you will likely want a deductible in the $100-$250 range.

In the end, there is no universally correct answer for how much car insurance you need. Wise coverage decisions are arrived at by looking at your budget and risk willingness, in conjunction with consulting with an insurance professional to discuss your options. Also remember that if you don't like what one insurance company is telling you, there are always plenty of companies willing to offer a quote. It takes some legwork and some brain work, but getting a plan that covers you well for a variety of contingencies is the smart choice.