This is probably the most often asked question when dealing with auto insurance – how much car insurance do I really need? Well, the truth is that the answer is different for every motorist. However, if you can figure out the answers to a series of basic questions then it should be fairly simple to identify your car insurance requirements – and what you can drop in terms of excess coverage.
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Do I Actually Need Car Insurance?
Let’s begin with the most obvious and frankly easiest question to answer. Yes, you need car insurance. It is against the law to operate a motor vehicle without some form of car insurance in all fifty states. How much actual coverage you are required to have varies from state to state (see our handy state guides for specific insurance information for your state). But you must have some form of liability coverage to pay for the damages (both medical and property) you may cause to other people in the event of a collision. Drive without auto insurance and you will be breaking the law, risking a costly citation, and could lose your license. Not only that, but if you do get into a wreck and you don’t have car insurance, the expenses could easily bankrupt you. So yeah, buy car insurance.
What Should My Liability Coverage Limit Be?
As referenced above, your state mandates a minimum amount of liability coverage that you are required to carry. How much car insurance you purchase beyond that is completely up to you. You could decide to have the minimum of insurance or could set a high limit.
PURCHASING THE MINIMUM AMOUNT
There is a major pro to carrying only the legal requirement for car insurance – your insurance premiums will be very low. Sounds terrific, right? Well, there is a major downside. You will be taking a very large risk with your personal finances. If you get into an accident your entire financial future could be in jeopardy. For example, let’s say you happen to run into a Mercedes on the way to work. Total costs including property and medical damages are over $300K. Your insurance will only cover $50K. How are you going to pay for the other $250K?
This is the type of scenario that keeps us up at night. The only people who should consider purchasing the minimum amount of insurance are people who don’t have much to risk. If you have virtually no assets and will have none in the foreseeable future, perhaps you can get away with this basic coverage. But if you are a motorist that has something to protect, then only buying the minimum of liability coverage is a massive gamble. Are you willingly to take the kind of risk in order to have cheap car insurance?
PURCHASING A WHOLE LOT OF LIABILITY COVERAGE
Driven mad by nightmares of going bankrupt due to a car accident, let’s say you go the other direction. You set very high limits. It’s all good, cause you’re totally covered, right? Yes, in such a case you would be well covered – perhaps too well covered. What do we mean by that? Essentially, it’s foolish to buy more insurance than is necessary. You don’t want to be insured for more than you are actually worth. You will be paying extremely high premiums protecting assets you don’t have. It’s not necessary to have a limit for millions of dollars if your total financial worth is significantly less.
The best way of determining what you liability limit should be is to evaluate your personal finances. If the worst were to occur, what would it do to you? What do you need to protect? It is not necessary to come up with an exact figure; a basic ballpark estimate will do just fine.
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Should I Carry Collision and Comprehensive Coverage?
One effective way of cutting back on car insurance expenses is to drop collision and comprehensive coverages. However, this may not be an option for every motorist. If you are leasing a vehicle or have taken out a loan to purchase one, more than likely you will not be able to drop these coverages. The financial institution that either owns your auto or has loaned you the money for it needs to protect their investment. This means that you have to pay.
If you are the owner of the vehicle, dropping collision and comprehensive coverage is available to you. It ultimately depends on the value of your auto. Like the bank, you need to protect your property investment. If you recently became the owner of a vehicle worth $20k, it would be unwise to leave it unprotected.
On the other hand, if your car has decreased in value at may be worth it to cut back on coverage. There is a monetary risk involved, but if you stay accident-free you could reap some significant savings. Over time, the difference in insurance costs could add up to more than your actual car is worth. Dropping coverages always comes with some sort of risk but if you car isn’t very valuable, this might be worth pursuing.
What Should My Deductible Be?
Setting your deductible amount should be based on how much you would be able (or willing) to pay in the event you have to file a claim. The advantage of having a high deductible is having lower premiums. And if you stay claim free for a period of time, this will prove to be a very wise move. The savings in insurance costs will more than make up for the difference in deductible amounts.
Now, if you are the type of person who lives paycheck to paycheck with little in savings, this may not be such a prudent move. What if your car gets banged up in an accident and your deductible is set at $1000. If you have only a few hundred dollars in the bank, how you are going to get your car fixed? The general rule is not to have a higher deductible than you can afford to pay at any one time. Also, if you are a person who finds the idea of handing out a sizable amount of cash at one time to be abhorrent, perhaps you should set a lower deductible and save yourself some mental anguish. After all, filing an insurance claim is stressful enough.
Only You Know Your Car Insurance Needs
What this all means is that really there is only one person that can figure how much car insurance you need. You. If you have a good grasp of your finances and what you need to protect, then you should be able to accurately estimate your insurance requirements. This way you can safeguard yourself and save as much money as possible.
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