When it comes to auto insurance, the age old question is how much auto insurance do I need? should you choose the cheapest option?
Let’s be clear with you: saving money isn’t the only part of buying auto insurance. You need coverage that really covers you, the kind that protects you from budget-busting car accidents.
You can fail the driving test 11 times before you get your license, but you don’t get many second chances when it comes to car insurance. either you’re covered or you’re not.
One of the main reasons it’s hard to get the right coverage is because, let’s face it, car insurance is confusing. That’s why we’re going to show you exactly what you need. For starters, most drivers should have at least three types of car insurance: liability, comprehensive, and collision.
But before we delve into the exact amount of car insurance you need, let’s understand some insurance terms.
why you need car insurance
driving without car insurance is not only silly with a capital d, it’s also illegal. however, 1 in 8 Americans drive without some form of auto insurance. I don’t do this. You will face serious consequences if you are caught on the road without car insurance. if you’re one of those guys who breaks the rules, this is not a rule you want to mess with. (but you can drive barefoot if that’s your thing!)
Another reason to get auto insurance is because it protects your finances and assets. How else are you going to cover the costs after your teen accidentally drives his truck through the garage door? (oops!) or when your uncle forgets to park your car and crashes into your neighbor’s new convertible? (crunch.)
The right amount of auto insurance can really save your financial skin. And in the grand scheme of things, it’s not that expensive. (more on average costs later).
what kind of auto insurance do I need?
First, let’s discuss some basic auto insurance terms. the deductible is what you have to pay before your insurance company pays its share. A premium is what you pay for your coverage (usually monthly). Your coverage limit is the maximum amount your policy will pay for each type of coverage. if you exceed your policy limits, you are responsible for any remaining costs.
Now, there are a lot of different types of auto insurance. the most important are liability, comprehensive and collision coverage. we’ll call them the big three. think of them as the basics: coverage you can’t afford to be without. if you have all three, it means you have full coverage.
Liability insurance covers medical or repair costs for others if you cause an accident.
every state of us requires you to have liability except in new hampshire and parts of alaska. So if you’re wondering, how much car insurance do I need? responsibility is not an option. you need to get the minimum liability from your state.
But those state minimums aren’t enough to protect you. We recommend having at least $500,000 of comprehensive coverage that includes both types of liability coverage: property damage liability and bodily injury liability. That way, if an accident is your fault, you’re covered for costs related to repairing the other driver’s car (property damage) and any costs related to lost wages or medical bills (bodily injury).
Without liability, you would have to pay for these things out of pocket. yes, let’s try to avoid that…
Comprehensive coverage protects you against theft or damage from fire, storms, natural disasters or even a tree branch falling on your car. comprehensive will pay to replace or repair your car as long as the damage is not due to a collision.
An estimated 78% of insured drivers have comprehensive coverage.2 Not required unless you have a loan or lease. And because accidents happen, we recommend wraps to protect yourself from life’s flukes.
Collision insurance covers the cost to repair or replace your car if it is in an accident with another vehicle or object. no matter who’s at fault, collision covers your vehicle rather than liability, which covers other people’s vehicles or medical bills.
nearly 3 in 4 drivers (74%) buy collision.3 Like comprehensive, it’s not required (again, unless you’re leasing or have a loan).
so you need collision? Here’s what we say: If you can’t replace your car with cash, you should get a collision. because, without it, you will be forced to replace your car if it is destroyed. The only time you may not need a crash is if your car is paid off and, again, you can replace it with your savings.
uninsured (um) and underinsured (uim) driver
Uninsured Motorist (UM) coverage covers medical expenses (for you and your passengers) resulting from a hit-and-run or uninsured driver, but does not cover damage to your vehicle. Please note that some states require you to have uninsured motorist coverage.
But what if you get hit by a driver who has insurance, but not enough? Underinsured Motorist Insurance (UIM) covers you when you are in an accident caused by a driver whose insurance coverage falls below the state-required minimums.
Occasionally, you’ll find uninsured motorist property damage, or umpd, packaged with um and uim. Although it typically has a lower deductible than collision coverage, you probably don’t need both umpd and collision coverage, since they essentially do the same thing.
medical payment coverage (medpay)
Whether or not you are covered by health insurance, medical payments (medpay) coverage covers reasonable medical expenses for you, your passengers, or any member of your family related to a car accident, no matter who has the blame. depending on where you live, medpay is a requirement.
personal injury protection (pip)
Personal Injury Protection (PIP) is similar to MedPay but has broader coverage, higher coverage limits, and a higher premium. but unlike medpay, pip generally has a deductible.
Currently, there are 22 states where you are either required by law to have PIP or have the option to purchase it as additional insurance.5 If you live in a state that requires you to have PIP, you should take full advantage of coverage if you ever do. needs to. here are some things pip can cover for you:
- medical expenses
- funeral expenses
- physical or occupational therapy
- substitute services such as babysitting or lawn care (if your accident left you unable to care for your family or household chores)
- partially lost wages
- funds to hire subcontractors to complete your work (if you are self-employed)
- type of policy
- policy limits and deductibles
- car type
- age and sex
- marital and family status
- handling log
- credit history
- how much you drive
- if you are married
- if you use your car for both business and personal use, even if it’s a small side business
- if you plan to travel out of state frequently
- if you have a teen driver who gets good grades or has completed driver’s education
- who you want to include on your policy
- if you have a college degree
- if you lease your car or still owe money
- if you own a home
- your occupation and the occupations of others on your policy, or if you are or have been in the military
- if you park your car in a garage
- if you have any anti-theft device installed in your car
- if you prefer electronic statements
- if you want to exclude any household member from your policy
although it varies from state to state, pip generally offers immediate coverage up to the limit set by your auto insurance and must be exhausted before resorting to medpay or your own health insurance policy.
optional car insurance coverage
Now that we’ve looked at the main types of auto insurance, let’s see what else is available.
guaranteed automatic protection (breach)
With the continuing rise in the cost of new cars, the average length of a car loan has expanded to six years or more, making differential insurance more popular than ever.6
let’s say you lost all common sense and instead of paying cash, financed a new SUV (seriously, don’t do this). If he totaled it a year later, his insurance company would only cover the actual market value (ACV) of the truck. so even though they would be giving him a fairly large check, it would not be enough to pay off his loan. That’s because new cars lose more than 20% of their value in the first year.7 Ouch!
gap insurance fills this “gap” by covering the rest of what you still owe on your loan.
Our recommended auto insurance coverage? Skip gap insurance and save yourself a financial headache by buying a used car for cash in the first place. If you already have an auto loan, try to pay it off as quickly as possible so you can close the coverage gap and lower your premium.
temporary car insurance
Temporary auto insurance is another type of coverage you should know about. it’s an option if you only plan to drive a car for a short period (usually six months or less). So if you’re going on an epic road trip with your siblings and planning to drive your sibling’s car, temporary car insurance comes in handy. however, most reputable insurance companies do not offer it. instead, it comes in the form of non-owners car insurance or rental car insurance.
If you speak by name to your mechanic, you may be tempted to sign up for mechanical breakdown insurance because it allows you to choose where to get your car repaired, as long as the mechanic is licensed. our advice? save your money and skip this coverage. If you still want to use your favorite mechanic, use your emergency fund to pay for emergency repairs, that’s what it’s for!
so how exactly do you manage without a car after an accident? who is going to pick up the kids from school or take you to work the next day? That’s where rental reimbursement coverage comes in. covers the cost of a rental car (up to a specified dollar amount and number of days) while your car is in the shop. If you think you’ll need this backup plan, it’s not a bad idea to add it to your policy.
pay per mile coverage
If your car tends to sit in the garage collecting dust, you may be interested in pay-per-mile coverage. With this coverage, a GPS device is installed in your car, so you are billed per mile, rather than an annual estimate.
Remember that time you drove down the interstate with no fuel, praying to get to the nearest gas station? Or that time she hit a pothole and was left with two flat tires? roadside assistance coverage saves you right now. It covers having fuel brought to you, having your battery jumped, taking your car to the nearest repair shop, or having a dead battery replaced. and if you don’t have something like aaa, it can really come in handy.
You may be wondering, why would I buy a general liability policy if I already have liability insurance? umbrella insurance (or personal liability insurance) is an additional layer of liability coverage that kicks in once you’ve reached your current policy limits. coverage is generally available from $1 million to $5 million. In addition to protecting your assets and paying for damages you’re legally responsible for in the event of an accident, umbrella insurance typically offers a broader form of protection than liability insurance for things like legal fees, false arrests, and even slander. If your net worth is $500,000 or more, umbrella insurance is a must to protect your assets!
If you have permanently installed aftermarket parts (not made by the original manufacturer) or performance parts on your car, you may have custom equipment coverage to help repair or replace upgrades such as custom running boards, stereo systems or even a custom paint job.
To save money, insurance companies often use aftermarket parts when they replace or repair parts on your vehicle. Original Equipment Manufacturer (OEM) backup coverage guarantees that the same parts that your manufacturer tested and used for the safety of your vehicle will be used in your car. A quick note about the OEM endorsement: Not all insurance companies offer this type of coverage. be sure to find an agent who will explain everything that is available to you and help you get the right amount of coverage at the best price!
discharge coverage (accident discharge or minor infraction discharge)
Did you know that a single at-fault accident can significantly increase your insurance premium? While forgiveness coverage may not turn back time and undo an accident (that’s what time machines are for), it can essentially wipe the slate clean by “forgiving” your first at-fault accident. Depending on your insurance company, this coverage may apply only once per policy term, or it may take years of safe driving to kick in.
If you live next to a golf course, you may want to have glass coverage to pay for the cost of repairing or replacing your car windows. Some insurance companies offer glass coverage with no deductible, but the cost of additional coverage can outweigh the benefits, especially with some windshield-only policies.
classic car insurance
If restoring or collecting classic cars is one of your hobbies, you’ll want to look into classic car insurance. this will protect your investment if that 1967 chevy corvette is damaged or stolen.
Driving for a rideshare company like Uber or Lyft is a great way to earn extra money. But most people who do this kind of work have no idea that their personal policy won’t cover the hustle and bustle of a rideshare. and rideshare companies don’t offer full coverage. that’s where rideshare insurance can make up the difference.
Should I choose a high or low deductible?
Now that you’re an expert on what type of auto insurance you might need, it’s time to dive deeper into choosing the right deductible.
If you choose a high deductible, your insurance company will consider you lower risk and reward you with a lower premium. If you choose a low deductible, your insurance company will see you as a higher risk and, you guessed it, give you a higher premium.
A $1,000 deductible generally means you’ll pay a lower premium. And since the first baby step is saving an initial $1,000 emergency fund, she’ll have the savings on hand to cover her deductible. But before signing up for a $1,000 deductible, work with her insurance agent to make sure it’s worth the extra risk by doing a break-even analysis while comparing rates.
For example, if you increase your deductible from $500 to $1,000, you increase your risk by $500. if that lowers your annual premium by $50, you’ll have to go 10 years without an accident to break even, not much. But if raising your deductible takes $150 off your annual premium, you’ll break even in just over three years. that makes a lot more sense! Whatever you do, there are plenty of ways to save on car insurance.
And if you’ve heard of something called a “disappearing deductible,” no, it’s not a magic trick. your payments will definitely not vanish into thin air. Some insurance companies offer disappearing deductibles at an additional cost for drivers with a long history of safe driving. the deductible decreases each year you are accident free. So if your deductible is $500 and you’ve been accident-free for five years, your deductible would be $0. but the deductible reappears in full at the time you have an accident. ta-da! Considering the added cost of coverage, it’s usually best to put that money aside to put toward your debt snowball or emergency fund.
how much does car insurance cost?
If your next question is, how much does car insurance cost?, we’ve got some numbers for you. the national average cost of auto insurance is $1,202 for full coverage or $644 for liability.8,9 (That works out to about $100 for full coverage or $54 for liability insurance per month).
but that’s just the average. there are a lot of factors that affect what you will pay. here are some:
Also, if your insurance company decides you’re high risk, you can definitely expect to pay more. but cheer up if he stays out of trouble for a while, his premiums will eventually go back to normal.
Another thing that could cause your premium to go up is if you consistently file claims. So if she has a $250 job thanks to a car accident, she may not want to file that claim. Frequent small claims are red flags that could cause your premium to go up. Plus, if she has a $1,000 deductible on a repair that costs $250, there’s no point in filing the claim because she’ll pay the bill anyway. your emergency fund is there for a reason!
Choose your battles carefully and only file a claim when it makes sense. A good agent will help you determine if it’s worth filing a claim or not, so be sure to call yours first!
how to take out car insurance
Now that you know everything there is to know about car insurance, the last question is: how do I get the right car insurance coverage? Whether you buy it on your own or use an insurance agent, here are some tips on how to get car insurance.
Having the following key information on hand will allow you to get the right policies and may even save you some hard-earned money in the long run!
With so many variables surrounding the types of auto insurance available, it’s easy to spend more money than your coverage is worth. It’s also easy to think you have enough when you really don’t have enough insurance.
Your goal is to find your auto insurance sweet spot. The best way to do this is to work with an independent insurance agent who is part of our Supported Local Provider (ELP) program. These insurance professionals are trusted and can analyze your unique situation to find you the best protection at the right price. they can answer your questions and even calculate the numbers to get you the best deal.
connect with an elp today!