How much auto insurance do you need?

Having the right amount of auto insurance could make the difference between financial health and ruin. If a person is found at fault in a serious traffic accident and does not have insurance, chances are good that the other party to the accident will sue to recover their damages.

This may force the person at fault to liquidate all of his assets including a home, car and savings accounts, possibly even forcing bankruptcy.

Fortunately, many car accidents fall within the limits of normal insurance coverage and a few simple guidelines can help choose the right amount of insurance coverage necessary while still keeping costs reasonable.

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Liability Insurance

The minimum amount of liability coverage needed is easy to determine. Each state has minimum legal requirements for liability insurance coverage. Keep in mind that this bare minimum coverage may not provide full protection in the event of an accident.

All of a person’s assets are in jeopardy if they cannot cover the costs of an accident with insurance alone.

Some states also require additional insurance in the form of personal injury protection, which covers medical expenses for the driver and her passengers, including lost wages at work in some cases.

Uninsured/underinsured motorist protection may also be required, and it covers a driver involved in an accident with someone who has no insurance or not enough insurance to cover all damages.

Next, although the costs related to an accident are impossible to predict, an individual should choose an amount of liability insurance with reasonable coverage limits, unless she is willing and able to pay for damages that exceed low insurance coverage limits.

To get an idea of the amount of coverage needed, it helps to understand how liability insurance is quoted. Agents quote the different parts of liability coverage as three numbers, such as 15/30/5, and the numbers vary by state and by policy choice.

The first translates into $15,000 of coverage for the medical expenses of one person in an accident. If the accident or injuries are severe, $15,000 does not go very far. The second number means that $30,000 is available to cover all persons injured in an accident.

If three or four people happened to be in the car, this would not be nearly adequate in a serious wreck. The final number is a $5,000 limit for damage to personal property, such as the other person’s car.

Given that new cars cost more than $20,000 on average, $5,000 is not much coverage.

Opting for higher insurance liability coverage limits increases the likelihood that insurance will cover all the costs of an accident.

A rule of thumb for choosing the amount of liability insurance needed: consider the value of all assets owned, including a home, car, investments, and savings, and make sure liability coverage is equal to this amount.

Comprehensive Coverage

Comprehensive insurance covers all types of damages that stem from events other than a collision. This includes damages due to things like fallen tree branches, flood, fire, animals or vandals. In addition, this coverage pays if a car is stolen, and is worth having if a driver does not have the savings to replace his car.

A high deductible keeps the costs down, and car owners will need to have money set aside to cover small accidents that fall within the deductible amount.

Additionally, comprehensive coverage only pays out based on the current market value of the vehicle, rather than the cost to buy it new.

Collision Coverage

Collision coverage takes care of all damages incurred to the policyholder’s own vehicle after an accident that resulted from a collision with another car or object.

As with comprehensive insurance, a higher deductible provides lower premiums and policyholders will want to plan to pay small or routine repair costs out of their own pocket.

Do I Need Comprehensive and Collision Insurance?

If driving a leased or financed vehicle, both these types of coverage are required. Once a car has been paid off and has depreciated in value, consider dropping one or both of these types of coverage to reduce overall insurance costs.

Keep in mind, though, that if the vehicle is damaged or a total loss, the policyholder will need to have enough savings to cover the entire cost to replace or repair the car.

Review the Policy Details

Overlapping coverage is not an effective use of hard-earned dollars. When reviewing a new insurance policy, individuals should verify all the coverage components to see whether some coverage might already be taken care of elsewhere.

For example, some insurance agents will include a $5,000 coverage amount for personal injury medical expenses.

However, this is already covered under a regular health insurance policy and would not need to be duplicated.

Insuring a Different Type of Car

If the car in question is a classic, collector or other show-type of vehicle, the insurance equation changes significantly. These cars are typically driven differently than a regular daily-use car, requiring coverage for different types of accidents such as damage sustained during car restoration or at car shows.

Many insurance companies specialize in this type of insurance, called agreed value insurance. This type of insurance can be much less expensive, although it carries several restrictions on how the car may be used.

Cars insured with this type of policy usually hold their value or appreciate over time, rather than depreciating.

A vehicle owner needs to have an independent appraisal prepared for his car as evidence of the value, to set the coverage amount on an agreed value policy.

High Risk Insurance

One more type of insurance is worth mentioning is high-risk insurance. The required coverage amount is typically the basic, minimum state-required liability insurance.

However, this type of insurance, also known as SR-22 insurance, is substantially more expensive than regular liability insurance for a driver with a clean driving record.

Individuals required to carry this kind of insurance are considered a much higher risk, and usually receive a notification from their state’s Department of Motor Vehicles letting them know they need to carry it.

SR-22 insurance is typically required for people who have been convicted of drunk driving, excessive speeding or other moving violations, or those involved in an accident without insurance.

Because of the high cost, it may be advisable to drive a much older vehicle with a low replacement cost and forego comprehensive and collision insurance.

Use our FREE quote tool to compare auto insurance rates today!

Related posts:

1. What is Uninsured Motorist or Under-Insured Motorist Coverage, and Do I Need it?
2. Full Coverage Car Insurance vs Liability Insurance
3. What is Uninsured and Underinsured auto insurance coverage?
4. What is GAP auto insurance?
5. What are the types of auto insurance?