How Much Car Insurance Should You Have?

Before jumping into how much coverage you need, let's review how car insurance works so you understand what you are paying for. Car insurance works using the idea of indemnity. You as the policy holder are entitled to be made whole or restored to your original financial position in the event you need to use your policy. For example, let's say that you drive a 2010 Honda.

If you were to crash this car into a pole, your insurance would be responsible to restore you to your previous position. In this case, they might pay to get the car repaired - if you have the proper coverage. Your car insurance would not be responsbile to buy you a 2024 Honda as that was not your previous position.

Car insurance companies charge you a premium to cover you. You can pay this premium in monthly installments or in lump sums typically on a 6 month or yearly basis. If you do not pay your premium, your coverage can lapse.

In addition to the premium that you will pay, you may also be required to meet a deductible before you can use certain types of coverage. Typically, collision and comprehensive coverage require a deductible, whereas liability coverage does not. We will look at these in the next section.

So, how does a deductible work? Let's say that you caused an accident and incurred $5,000 worth of damage to your own vehicle and had a deductible of $500. If you had collision coverage on the vehicle, you would be able make a claim to cover this damage.

However, you would need to pay your $500 deductible before your carrier covered the rest of the damage. Car insurance companies apply deductibles to certain types of coverage to make sure that individuals are not taking advantage of them for smaller repairs.

For example, let's say that your vehicle was scratched and it was going to be $300 to repair. You could make a claim with your carrier, but the deductible costs more than the repair itself. In this case it would make more sense to cover the cost out of your own pocket.

You can typically put car insurance coverages into one of two buckets. The first bucket is coverage that protects other drivers, their property and your assets from lawsuits. The second bucket is coverage that protects yourself, and your property.

Coverage for other drivers on the road is commonly referred to as liability coverage. This type of coverage is designed to cover the costs of other drivers when you are at fault in an accident. There are two types of liability coverage.

a) Bodily injury - This covers the expenses that others incur from injuries or death when you are the at fault party in an accident. This coverage protects other drivers on the road, their passengers, and pedestrians.

b) Property damage - This covers expenses for other people's property as a result of an accident where you are the at fault party. For example, if you hit another driver's vehicle or ran into a homeowner's fence, this coverage would pay for these damages.

Liability coverage has a set limit. For example, you might buy liability coverage that has a $100k/$300k/$100k split. This means you would have $100,000 of bodily injury per person in an accident, $300,000 of total bodily injury coverage, and $100,000 worth of property damage coverage.

c) Protection of your assets - The coverages discussed above are designed to protect other individuals on the road. However, they also protect your assets by default. For example, let's say that you cause an accident that causes serious injury to another driver.

In this instance, the bodily injury coverage you carry on your policy would kick in. However, let's say that the amount of coverage that you have on your policy is not sufficient to cover the medical costs of the other driver's injuries.

This driver could hire an attorney and go after your assets to get compensated for the injuries that they sustained. This is why it is important to make sure you have substantial liability coverage to protect both other drivers, as well as your own assets.

If you own your vehicle outright, collision and comprehensive coverage is optional. If you have a loan or lease on your vehicle, you are required to add collission and comprehensive coverage. Uninsured motorist or medical payments might be legally required by your state. When you add on these coverages, you have "full coverage."

a) Collision coverage - This covers the cost to repair damages to your car from collisions with other vehicles, as well as collisions with other objects including trees, poles, fences, and buildings. You can use this coverage even when you are at fault in an accident. Collision coverage will have a deductible you must meet in most cases. Unlike most other coverages, collision coverage does not have a set limit.

b) Comprehensive coverage - This covers your car in events that are not related to a collision with another vehicle or object. This can include fire damage, hail damage, vandalism, damage from falling objects such as a tree, damage from an animal, and reimbursement if your vehicle is stolen. Comprehensive coverage will have a deductible you must meet in most cases. Unlike other coverages, comprehensive coverage does not have a set limit.

c) Uninsured/underinsured motorist coverage - If you are hurt by another driver in an accident and that driver does not have car insurance or lacks sufficient coverage to protect you, this coverage can kick in. It is a coverage that you hold on your own policy to protect you from uninsured or underinsured motorists. The exact rules of this coverage can vary by state so make sure to consult a licensed insurance agent in your area.  
d) Medical payments - This covers any medical expenses that you or any of your passengers incur from an accident, regardless if the accident is your fault or the fault of another driver. Drivers who often opt for this coverage plan to use it to pay for their health insurance deductibles if they are injured so that they won't incur any out-of-pocket costs.

a) Roadside assistance - If you need a tow, a jump start, run out of fuel, get a flat tire, or get locked out of your car, this coverage can help reimburse you for some of those expenses. The services that are covered under this type of coverage can vary by carrier so make sure to discuss them with your insurance agent.

b) Rental car reimbursement - If your car is being repaired as a result of a covered claim, you can get reimbursed the cost of a rental vehicle. This coverage does not apply for normal mechanical maintenance. You must make a claim that is covered under your policy to use this coverage.

Before determining how much coverage you need, you first need to understand the types of coverage that you need.

a) If you have a loan or lease on your car - Anytime that you finance or lease a car, your lender will require you to obtain full coverage. Full coverage is the combination of legally required liability coverage with comprehensive and collision coverage.

Lenders require this since they have a financial stake in your vehicle. For example, let's say you financed a car that cost $30k. If you were to go out and cause an accident in it that resulted in damage to the vehicle, the lender needs to protect their financial stake.

Collision coverage would kick in in this scenario. There are also instances not related to accidents, such as theft, that lenders want covered. This is where comprehensive coverage would kick in. There is no way to get around this. If you have a loan or lease on a car, you will need to obtain full coverage.

b) If you do not have a loan or lease on your car - If you own your vehicle outright, full coverage is optional. You will be required by law to have liability coverage. Even though you are not required to have full coverage in this scenario, it is often a good idea.  

c) Consider optional coverages - Many of the optional coverages that insurers offer are usually affordable add ons that can make your policy better. Ask your insurer what optional coverages they offer so you can decide if you want to add any on.

At the very least, you will need to meet your state's minimum requirements for liability coverage if you don't have a loan or lease on your car. For most states, this will be somewhere in the range of $25,000/$50,000 for the bodily injury portion of the coverage and $15,000 to $25,000 in property damage. (Make sure to check your state's requirements as this is simply a general range.)

Using the numbers above, you would have $25,000 per person and $50,000 total for bodily injury coverage to cover the cost of injuries if you caused an accident and someone else was hurt. The second set of numbers means that you would have $15,000 to $25,000 to cover expenses related to the damage of another person's property if you caused an accident.

Although these ranges are typical in most states, you must ask yourself the question, is that enough? Your car insurance is not simply designed to protect your car and other drivers. It is also designed to help you protect your entire financial life in that proper coverage can help mitigate your liability if you cause an accident.

For example, let's say that you currently have car insurance, but you only carry the legal minimum requirement for your state. One day you cause an accident that results in injuries and damage to another driver's body and vehicle.

Lets assume that this accident was severe, and that the other driver incurred injuries that costed $60,000 and significant damage to their vehicle that costed $30,000. If you only have the coverage listed above, you could be sued by the other driver to cover the additional costs they incurred as a result of the accident you caused.

With this in mind, it is well worth spending extra money on your car insurance each month to avoid a potential lawsuit that could derail your entire financial picture. The exact amount of coverage you need will vary, but a good starting place is to make sure you have at least $100k/$300k limits for bodily injury coverage and $100k for property damage coverage.  

One of the reasons that you might opt to buy full coverage is because your vehicle is valuable. For example, let's say that you bought a vehicle worth $35k with cash. In this scenario you would not be required to obtain full coverage (comprehensive and collision) in addition to required liability coverage.

However, let's assume that your vehicle maintains its value. If you were to go out and cause an accident that resulted in damage to your own car, you would be on the hook to cover those expenses out of pocket. If another driver hit you, you would make a claim against their insurance.

Additionally, if your vehicle were stolen, or if a tree fell on it for example, you would again be responsible to cover those expenses out of pocket. If your vehicle is valuable, it is worth buying full coverage so that you would not have to pay these expenses out of pocket.

Beyond the value of your vehicle, you can also consider the type of vehicle you have. For example, let's say that you just bought a large vehicle such as a Ford F-250. If you were to cause an accident while driving on the highway, you would likely cause more damage than you would if you drove a smaller vehicle.

If you only carry the minimum state liability coverage required, you can find yourself in a position in which you do not have enough coverage. In this scenario it would be a good idea to buy more liability coverage than required.

To further drive home the points above, let's look at an example. Let's imagine that John is buying a new car for $35,000. For sake of example, John is going to finance the purchase of the vehicle. Since John is going to do this, his lender is going to required him to buy full coverage.

This would include the minimum liability requirements for his state, as well as comprehensive and collision coverage. However, John is smart and wants to buy a higher amount of liability coverage than required so that he is better protected. For this reason, John opts to buy full coverage car insurance with liability limits of $100k/$300k/$100k.

This means John would have $100,000 of bodily injury coverage per person, $300,000 of bodily injury coverage per person, and $100,000 of property damage coverage. These coverages are designed to protect the other drivers on the road in case John were to cause an accident.

If you are shopping for quotes, one of the easiest ways to do it is to go directly to the insurer. You can go directly to the website of a particular insurer such as State Farm or Progressive to request a quote. You can also call the insurer and ask for a quote over the phone.

Insurance brokers do not represent a single insurance company. Instead, they work with lots of different companies and can offer lots of different policies. If you want help comparing quotes from different companies, brokers can be a good option.

There are many online services that allow you to compare quotes from a variety of carriers. Simply go to the website of a comparison service and enter the necessary information. You will then be provided with a range of quotes to review. Quotewizard would be an example of a popular comparison service. Keep in mind that the quotes you get are not always accurate and are more of an estimate.

When shopping for car insurance it is important to compare several quotes to make sure you are getting the best possible price for your desired coverage. In general, wait until you have at least 3 to 5 quotes and compare them. It can be tempting to go with the cheapest option, but as previously stated cheap is not always best when it comes to car insurance.

Make sure that you have proper coverage and understand your coverage. Check the reputation of the company and make sure that the company has strong customer service so that you can rely on them when needed.

Once you have found a quote that you like with a reputable company, you can set the policy up. Most of the time individuals pay monthly, but carriers will also allow you to pay a lump sum for your policy if you desire. After your new policy is set up, you can cancel your old one. Make sure that you do not cancel your old policy until your new one is in place in order to avoid a lapse in coverage.

The bottom line is that you need to have full coverage car insurance if you have a loan or lease on your car, as well as your state's minimum liability coverage requirements. If you do not have a loan or lease on your car, full coverage is not required, but is often a good idea if your car is reasonably valuable.

It is also a good idea to buy more liability coverage than your state requirements. For most states, the minimum limits are not going to provide you with substantial coverage. You can ask your insurance agent how much more coverage you need above the minimum requirements.