Every car insurance policy is different. Many people overpay for coverage they don’t really need. Meanwhile, others don’t have enough coverage and come to understand that when it’s already too late.
So, how much car insurance do you need? Many people are looking for an answer to this question.
It’s a complicated one because there are many variables to consider like:
- Is your car new or used?
- Which year was it manufactured?
- Where do you live?
- What is your driving record like?
- How much do you earn?
But the most important question is this: How valuable is your car to you?
Every state has its own car insurance limits. In some states, you might need more coverage than in others. It’s always good to reflect on your own financial situation.
Try to understand the different types of protection and how they could work for you.
How Much Auto Insurance Do I Really Need?
To drive legally, you need at least some sort of insurance in most states. Using this Carinsurance.com guide, you can search for the minimum car insurance requirements in your state here.
The easiest thing to do is buy a minimum coverage policy, but it is not always recommended. Your car insurance should protect you from financial ruin if an accident occurs. You might lose a large amount of money and put yourself in a tight situation. That’s because these policies often do not cover all costs if an accident happens.
So, it’s always good to consider other types of insurance policies and the different types of coverage you can get.
Understanding Liability Insurance and Mandatory Minimums
Before you decide on a car insurance policy, it’s a good idea to understand what’s out there and how the different policies can work to protect you. Also, be aware that all states have their own coverage requirements. If you want to find out what car insurance minimums are required in your state, visit the most recent Insurance Information Institute’s financial responsibility laws for automobiles by state. Also, check with your state’s DMV to discover if any laws have changed.
In the case of an accident, liability insurance pays for the damage caused by you or the other driver. Liability insurance pays for all the fees, vehicle repairs, medical bills, and any other costs associated with the accident. It’s always good to have some sort of liability insurance. Otherwise, you will have to pay for many things yourself.
There are three main limits to liability coverage. You will see them as a ratio of three numbers in your auto insurance policy. For example, minimum state requirements for liability might be 20/40/5. The number 20 stands for $20,000 and this is the maximum your issuer can pay the person you injure.
The second number stands for $40,000 as you may have figured out already. This is the maximum amount of money the issuer will pay for anyone injured in the accident regardless if it’s two, three, or more people. The third number is the money your issuer can pay for any property damage, more precisely, damage you caused to the other party’s car. In this case, it’s $5,000.
Of course, you will be compensated if the other person is at fault through their liability insurance.
How Much Liability Insurance Do I Need?
If you want to save money, buying the minimum amount of liability might not be the best choice. The minimum liability insurance is only the amount you must have. The state minimums may not always cover all the damages.
The role of every liability insurance is to recover your assets as much as possible in the worst-case scenario. If you want to be smart with your money, minimum liability insurance may not be the way to go. If you get into an accident with minimum liability insurance, you may find yourself dipping into your savings and other assets.
Our advice to you is that you should have enough liability insurance to never have to go into your main assets like savings, car, house, and investments following an accident.
Chuck Tannert from Investopedia says, “Most experts recommend at least $100,000 per person, $300,000 per accident for bodily injury and approximately $40,000 for the replacement value of the average car.”
What should you do if you want higher limits? You can consider the umbrella policy. With it, you can expand your home and auto insurance without spending much more.
What are Minimum Levels of Liability Car Insurance Best For?
Minimum liability insurance is better than no insurance at all. However, if you don’t have any savings or assets, it may not be the best choice for you. As mentioned earlier, most states require you to have it to drive legally. But it’s not nearly enough to pay for a new car or serious injuries.
If someone takes you to court, your chances of losing are high. If you do not have a job, you can plead “judgment-proof.” Judgment-proof people are those without any assets. Even if you lose the case, you’re not required to pay anything to the other side but that is extremely risky.
Ways to Get Started
If you buy auto insurance, you should consider what’s the best fit for your family budget. You can start by checking the minimum insurance requirements for your state. Next, you should evaluate your assets, including your car. Protect your savings, home, and investments by getting the right quote from an insurance company.
You can also use the services of an independent consultant. He or she can help you browse the different policy options.