Auto insurance policies are based on individual needs and requirements. The types and levels of coverage you need will depend on legal requirements, your personal budget, and whether you finance or pay cash for a vehicle.
Car insurance policies are like building blocks. You can add coverages when you need them or remove protections when they’re no longer required or useful. You have several options to reduce costs within your control when it comes to car insurance. Let’s review some of the key car insurance expenses, and whether you need them.
How Much Car Insurance Do I Need?
State laws mandate the types and levels of auto insurance coverages you must purchase before taking your automobile out on the road.
For example, California requires all motorists to carry at least $15,000 in bodily injury liability coverage for one injury in a single accident, $30,000 in coverage for multiple injuries, and $5,000 in property damage liability coverage.1
While liability insurance is the most common mandatory coverage, some states require other types of protections. For instance, Massachusetts requires bodily injury and property damage liability coverages, as well as personal injury protection and uninsured motorist coverage.2
If you’re at fault for an accident that causes serious injuries to the other driver, you’ll likely need more liability coverage than your state requires. Consider this: The average hospital stay costs around $10,000 per day, according to the U.S. Centers for Medicare and Medicaid Services.3
Insurance experts recommend carrying at least $100,000 in liability coverage for one injury, $300,000 for multiple injuries, and $100,000 in property damage liability, typically described as 100/300/100 coverage.4
You may also choose to beef up your coverage for added asset protection.
Bodily Injury Liability
Most states require drivers to carry bodily injury liability coverage. If an accident results in physical injury to someone else, bodily injury liability can help pay the medical expenses of the other driver and their passengers.
For many drivers, the recommended 100/300/100 policy, which includes $100,000 in liability coverage for one injury, will provide enough coverage.
Property Damage Liability
Most states also typically require you to carry a minimum level of property damage liability coverage, which pays for damages caused by your car to property you don’t own.
Again, your state’s minimum coverage might not be enough to protect your assets, especially amid the rising price of automobiles. If a California driver carrying only the required $5,000 in property damage liability collides with a Lamborghini, you can imagine they would face serious out-of-pocket costs.
Optional umbrella insurance policies, which kick in after you’ve exhausted your car insurance policy’s liability limits, can help maximize your protection. Umbrella policies can cover many types of liability, including injuries and property damage, potentially offering coverage of hundreds of thousands of dollars more.
States don’t require collision coverage, but if you finance your car, the lender will. Collision coverage can help pay to repair or replace your vehicle if it’s damaged in a collision with another automobile or an object such as a building or tree. Collision coverage requires you to pay a deductible. Choosing a higher deductible can decrease your rate, but you’ll have to pay more out of pocket if you file a claim.
For a totaled car, collision coverage usually pays actual cash value, which applies depreciation for its age and general wear and tear. After paying off your car loan, you may consider dropping collision coverage if you need to save money with insurance. If you own your car outright and its worth is near or below the amount of your collision deductible, you don’t need to continue the coverage.
When financing an automobile, the lender will likely require you to buy comprehensive coverage. Comprehensive coverage covers non-collision losses such as damage caused by natural disasters or vandalism, and can help pay to replace your automobile if it’s stolen.
Comprehensive coverage requires paying a deductible, which you can increase to lower your premium. Although comprehensive coverage is affordable and valuable when you need it, like with collision coverage, you probably don’t need to continue coverage once your vehicle’s value nears the coverage’s deductible amount.
If you’re involved in an accident that causes injuries, medical payments coverage can help pay the medical expenses of you and your passengers. It can help pay for visits to doctors, emergency services, hospitalization, and nursing care, no matter who caused the accident.5
This affordable coverage is only required in a few states, and isn’t available in all states.
Personal Injury Protection (PIP)
Several states require motorists to carry personal injury protection (PIP) coverage, which helps pay medical expenses, regardless of who is at fault for an accident. PIP goes a step further than medical payments coverage, paying expenses such as funeral costs and lost wages. PIP coverage is not available in all states.6
Some states require automobile owners to carry uninsured motorist coverage, underinsured motorist coverage, or both. Uninsured motorist coverage can help pay your medical bills or car repair costs if an uninsured driver causes an accident with your vehicle. Underinsured motorist coverage can help pay your medical bills if the at-fault driver’s bodily injury liability coverage doesn’t pay all your expenses.
Examples of Car Insurance Needs
Auto insurance doesn’t come in one-size-fits-all packages. You can change your coverages throughout the life of your car. If you finance a new set of wheels, you’ll need to carry state-required coverages, plus collision and comprehensive coverage.
After paying off the auto loan, you can discontinue collision and comprehensive coverages, but consider continuing the protections if the automobile’s value is substantially higher than your deductibles. When you renew your car insurance policy, you also have the option to raise your deductibles to lower your rate.
Let’s look at a few examples.
Example 1: New luxury vehicle
Janice, the founder and CEO of a company, just bought a new Mercedes Benz A-Class for around $33,000. She financed the vehicle, so she purchased a full-coverage policy with collision and comprehensive coverages.
For liability coverage, she chose higher coverage than her state requires, using the recommended 100/300/100 coverage levels. Since her net worth is above $1 million, she also carries an umbrella policy to protect her assets. Janice usually trades in vehicles every two years, so she plans to keep all coverages until she buys another car.
Example 2: Fully-owned vehicle
Randy bought a new Toyota Camry in 2016. Like Janice, he chose a policy with 100/300/100 liability limits, but since he’s a graduate student with modest assets, he doesn’t see the need for an umbrella policy.
Randy just made his last car payment and received the Camry’s title. Although Randy could discontinue collision and comprehensive coverage since he owns his car outright, he has decided to keep the coverage for a few more years because the automobile still has a market value of around $18,000.
But since Randy plans to keep his Toyota as long as it’s roadworthy, he plans to drop collision and comprehensive coverages when the car’s market value drops to around $1,000.
Example 3: Older vehicle
Sam just graduated from college and bought the only vehicle he could afford: an old Ford truck, which he bought for $1,000. Although he has few assets, he decided to buy a policy with 100/300/100 liability limits, which his insurance agent recommended.
But since his truck isn’t worth much, Sam didn’t buy collision or comprehensive coverages.
Frequently Asked Questions (FAQs)
What do you need to get car insurance?
When requesting an auto insurance quote or applying for a policy, the insurer will need to know the make and model of your vehicle and its vehicle identification number (VIN). You’ll also need to share the driving histories of all drivers covered by the policy. The provider will also collect personal information such as the drivers’ ages, driver’s license numbers, and Social Security numbers.
How much does car insurance cost?
Insurers base auto insurance rates on several factors, including your age, location, and driving record. Factors such as the type of car you drive, how much you drive, and where you park your vehicle also impacts your insurance premium. Finally, the types and limits of coverages, along with deductible levels, also determine your rate.
How much car insurance do you need if you have a warranty?
Auto insurance and a vehicle warranty provide different protections. Car insurance pays for injuries and property damage following an accident, along with auto theft, if you carry comprehensive coverage. A car warranty covers your car’s parts when they break or malfunction during the warranty period. Usually, warranties provide about three years of coverage, while auto insurance is renewable.
Does a younger driver need extra insurance coverage?
If you add a teen driver to your auto policy and are concerned about their inexperience behind the wheel, consider raising your liability limits or adding an umbrella policy. You can purchase a vehicle that is more affordable to insure. Also take advantage of discounts designed for young drivers, like good-student and driver-training discounts.