Are you a first-time car owner and feeling confused about the amount of insurance you need? It’s important to remember that having insufficient auto insurance can leave you financially vulnerable. However, overpaying for insurance can also be a waste of money. Here’s a guide to help you understand auto insurance costs and make an informed decision.
Determining Your Auto Insurance Needs
In every state, drivers are required to meet certain financial responsibility obligations, which most often involve purchasing auto insurance. This is typically the easiest and most affordable way to meet these requirements. If you choose not to purchase auto insurance, you may be required to post a bond of up to $50,000 to demonstrate financial responsibility.
Assuming you want to avoid paying such a hefty amount, the next question is how much auto insurance do you actually need? In this article, we’ll provide a comprehensive overview of auto insurance and explain its importance. We’ll also discuss the different types of coverage available, as well as how auto insurance works, making the process of obtaining it as stress-free as possible.
What is Auto Insurance?
Auto insurance provides financial protection in the event of a car accident, theft, vandalism, fire, or other natural disasters. While some coverage only applies if you are at fault in an accident, other types of coverage can pay out even if you are not at fault. Certain types of coverage can help with medical expenses, while others cover property and car damage.
In 2020, the average cost of an auto insurance claim was $20,235 for bodily injury and $4,711 for property damage. It’s important to keep in mind that the coverage limit you choose is the maximum amount your policy will pay out. Any amount above that is your responsibility. Therefore, it’s crucial to balance policy affordability and coverage levels.
How To Buy Car Insurance
When shopping for auto insurance, it’s not just about finding the lowest price. According to the National Association of Insurance Commissioners, the average cost of liability, collision, and comprehensive coverage across the US is $1,190. It’s important to consider factors like the reputation of the insurance company, their customer service, and the specific coverage options included in the policy.
Due to varying methods of rate calculation among different auto insurance companies, the cost of coverage can vary by thousands of dollars annually. It is advisable to compare rates from various providers in order to obtain the best deal. This can be done by obtaining quotes online or by reaching out to on-site agents of the different insurance companies that you are interested in.
Be sure to ask about the range of discounts offered by each insurance provider. These may include incentives for being a safe driver, having a safe vehicle, bundling policies, paying in full, and choosing paperless billing.
In addition, take into account the quality of customer service provided by the insurance company. The best auto insurance providers strike a balance between affordable prices and exceptional customer care. It is important to have confidence that your insurance provider will make the claims process as straightforward as possible in the event of an accident.
If you are concerned with affordability and are wondering how much auto insurance you need, continue reading for a comprehensive answer to your question.
How does auto insurance work?
If you’re a first-time car owner, you may be wondering how auto insurance works. Simply put, car insurance works by assuming some of the financial risks associated with owning and operating a vehicle. In exchange for this coverage, you pay a premium to an insurance company.
To determine the right type and level of coverage for your needs, you can work with an insurance agent who will guide you through the process. Once you’ve agreed on the coverage, you can purchase your policy by paying the premium.
An insurance policy is considered to be a contract that is based on a good faith agreement. In the event of a covered claim, your insurance company will pay for losses up to the limits of your coverage. However, for certain types of coverage, such as comprehensive and collision insurance, you may need to pay a deductible out of pocket before the coverage takes effect.
If you are responsible for causing an accident and you have a collision deductible of $500, you will be required to pay the first $500 for vehicle damage. The remaining cost (up to the actual cash value of your vehicle) will be covered by your insurance company. In some cases, your insurance provider may subtract the deductible from your payout amount.
Do I really need car insurance?
Auto insurance is a requirement by law in the United States, with 49 out of the 50 states mandating liability insurance. The specific regulations pertaining to the necessity of liability insurance vary depending on the state. Some states mandate bodily injury and property damage liability insurance, while others require uninsured motorist coverage or personal injury protection.
It is important to note that while New Hampshire is the only state that does not require auto insurance, they do mandate that drivers demonstrate their ability to fulfill the minimum financial responsibility requirements of the state in the event of an accident. Therefore, it is necessary to have car insurance in all states in some form or another.
It should be noted that while New Hampshire is the sole state that does not mandate auto insurance, it does require drivers to demonstrate their ability to meet the minimum financial responsibility standards of the state in case of an accident. As a result, car insurance is necessary for some form in all states.
Which kinds of automobile insurance do I need?
The type of automobile insurance you require is contingent on several factors, such as the value of your vehicle, your location, and what other assets you need to safeguard. However, it is essential to be aware that you must purchase at least the minimum amount of auto insurance required by your state.
Nevertheless, state regulations are often insufficient and may not cover the cost of repairing your vehicle. If you desire better coverage, you will need to invest in more than just the bare minimum. There are numerous options for coverage.
By having a basic understanding of the most popular types of auto insurance, you can create a comprehensive coverage plan that meets your specific insurance needs. An auto insurance policy essentially consists of several individual insurance policies.
Auto insurance coverage can be categorized into several types, including bodily injury liability, property damage liability, medical payments, personal injury protection, collision coverage, comprehensive coverage, and uninsured/underinsured motorist coverage. The necessity and optional nature of these types of coverage vary depending on the state of residence and any auto loan or lease agreement with a lender. To ensure sufficient protection, you may
consider purchasing additional insurance coverage beyond the minimum requirements mandated by the state or lender.
The amount of auto insurance needed for each type of coverage
When determining how much auto insurance you need for each type of coverage, it is crucial to note that the bare minimum amount of insurance required by the state may not cover the cost of repairing your vehicle. Therefore, you should purchase more than the minimum coverage to obtain better protection.
To create a comprehensive policy that meets your individual needs, you should have a basic understanding of the most common types of auto
insurance. These include bodily injury liability insurance, property damage liability insurance, uninsured or underinsured motorist insurance, collision insurance, comprehensive insurance, personal injury protection, and medical payments insurance.
Bodily injury liability insurance provides coverage for unintentional property damage and bodily injury to third parties, including medical costs, pain and suffering, lost wages, damaged goods, and vehicles. Additionally, defense and court fees are covered under this type of coverage.
To comply with state regulations, you must obtain a minimum amount of liability insurance. However, it is possible to purchase additional insurance coverage. Liability insurance is designed to protect you in situations where you are found liable for damage or injuries caused to others. Here are some examples of situations where liability insurance coverage would apply:
1. Rear-ending another car at a red light and causing damage to it.
2. Running over your neighbor’s fence.
3. Causing injuries to another driver in an automobile accident that you were at fault for.
How much does bodily injury liability insurance cost?
In California, for instance, you are required to have liability insurance with a minimum of $15,000 in bodily injury coverage for one person, $30,000 in bodily injury coverage for multiple people in a single-car accident, and $5,000 in property damage coverage (written as 15/30/5).
However, it is important to note that these minimum amounts may not be sufficient in the event of a catastrophic car accident. For example, if you cause an accident that results in several injuries, medical bills may quickly exceed the $30,000 bodily injury coverage limit. Similarly, $5,000 in property damage coverage may not be enough to cover the cost of replacing a totaled vehicle.
To ensure that you are adequately protected in the event of an accident, it is recommended to purchase enough liability insurance to cover the amount you would potentially lose in a lawsuit. In California, a liability insurance policy with 250/500/100 coverage would be a much better option than the required minimum coverage. Any amount beyond your coverage limit will be your responsibility, so it is important to consider the potential costs of damages and injuries when selecting your liability insurance coverage.
Consider adding an umbrella insurance policy to your existing auto and home insurance plans to provide an additional layer of liability coverage. An umbrella policy is a cost-effective way to increase your liability protection by an extra $1 million or more.
One essential coverage under an auto insurance policy is property damage liability insurance. This coverage aims to cover the repair costs of any property damage caused by the at-fault driver. It can cover the cost of repairing another vehicle, a building, fences, mailboxes, or any other property that may have been unintentionally hit.
If you are responsible for an accident that causes significant damage to multiple vehicles or a building, your state’s minimum coverage may not be enough to pay for all the repairs. Additionally, if you live in a wealthy location where expensive cars are prevalent on the road, such as Los Angeles or Miami, the minimum coverage may be insufficient. Adding an umbrella policy can help you avoid these potential gaps in coverage.
The amount of property damage liability insurance to buy
Most states require drivers to have property damage coverage, just like bodily injury liability insurance. This coverage is indicated as the third number in the series on your policy, for instance, a 25/50/20 policy offers a total coverage of $20,000. Although some states require as little as $5,000 or $10,000 in property damage liability insurance, $20,000 or $25,000 is more common.
While it is possible to opt for more than the legal minimum, the financial risk of property damage is typically not as high as it is for bodily injury liability, unless you collide with an expensive vehicle like a Lamborghini or Rolls-Royce. Typically, experts recommend a standard amount of $50,000 in property damage insurance, or more if you have substantial assets to protect.
Uninsured or underinsured motorist insurance can be useful in cases where the driver at fault is not carrying enough insurance or is not insured at all, which is more common than you might think. In 2019, approximately 12.6% of drivers did not have insurance. This type of coverage can provide additional protection in situations where you are injured or your vehicle is damaged in a hit-and-run or by an uninsured or underinsured driver.
If you have uninsured motorist coverage, it can pay for a variety of expenses including health-related costs for you and your passengers, lost wages due to injury, funeral expenses, pain and suffering, and car damage (depending on state regulations).
How much uninsured or underinsured motorist coverage should I buy?
In certain states, drivers are required to have uninsured motorist coverage (UM), and some states also mandate underinsured motorist coverage (UIM). For instance, in Maryland, drivers must have at least $30,000 per person and $60,000 per accident in uninsured/underinsured motorist bodily injury liability insurance coverage. Additionally, they need a minimum of $15,000 in property damage coverage for uninsured motorists. Although not mandated in some states, uninsured/underinsured motorist coverage is still available for purchase.
It’s a good idea to consider getting uninsured/underinsured motorist coverage if your existing coverage is inadequate in covering your bills in case of a severe accident. This is especially true if you do not have adequate health insurance or medical coverage through your auto insurance policy.
Collision insurance, on the other hand, is not required by law, but it is mandated by lenders if you have leased the vehicle or owe money on a loan. This policy pays for vehicle repairs if you are at fault in an accident. Choosing the amount of collision coverage you need is straightforward because you already know the worth of your vehicle.
How much collision insurance should I buy?
While collision insurance is not mandatory in most states, it may be required by lenders if you have a car loan or lease. If you do not have a loan or lease, you may still want to consider purchasing collision insurance in case you get into an accident and cannot afford to pay for repairs out of pocket.
When deciding how much collision insurance to buy, consider the value of your car and the deductible, which typically ranges from $250 to $1,000. For example, if your car is worth $20,000 and you have a $1,000 deductible, you would pay the first $1,000 and your insurer would cover the remaining $19,000.
However, as your car’s value declines over time, you may want to reevaluate your collision coverage, as you could end up paying more in premiums and deductibles than the value of your car.
Comprehensive insurance, which covers damage from events outside of your control such as theft, vandalism, or natural disasters, may also be required by lenders but is not mandated by law. This insurance can cover the value of your car or the remaining balance on your loan in case of such events.
How much comprehensive coverage should I buy?
In some states, collision coverage is not mandatory, although it may be required by your lender if you have an auto loan or lease. Once you have paid off your loan or returned your rented vehicle, you can discontinue this coverage.
When deciding whether to purchase comprehensive coverage that is not required, you should consider whether you can afford to pay out of pocket if your car is stolen or damaged and you need to pay for repairs or purchase a new vehicle. You should also evaluate the value of your car in relation to the cost of annual insurance premiums.
Personal injury protection (PIP) is a type of insurance that covers medical expenses for you and your passengers regardless of who is at fault in a car accident. PIP may also cover other costs such as lost wages, funeral expenses, and replacement services like house cleaning or child care that you are unable to perform due to your injury. Some states require PIP as part of their “no-fault auto insurance” laws, while in other states it is available as an optional policy.
How much PIP insurance should I buy?
PIP insurance requirements vary by state, with some states like Florida mandating a $10,000 per person coverage, which may not be sufficient. It’s recommended to consider at least $50,000 per person if allowed in your state, as this coverage functions similarly to bodily injury liability. Note that PIP rules differ by state, such as in Florida, where basic or extended PIP options are available.
Basic PIP coverage in Florida covers 80% of medical bills and 60% of lost wages and replacement services, while extended PIP coverage covers 100% of medical bills and 80% of lost wages and replacement services. If PIP is optional in your state, you may choose to decline it if you have comprehensive health insurance coverage. However, PIP provides some benefits that health insurance does not, such as reimbursement for services and lost wages.
Medical payments insurance, also known as MedPay, is similar to PIP in that it covers medical expenses and other costs for you and your passengers, regardless of who is at fault in an accident. Some states, including Pennsylvania, Maine, and New Hampshire, mandate the inclusion of MedPay in vehicle insurance policies.
What are some optional car insurance coverage types?
If you’re wondering about the appropriate amount of car insurance to have, you may want to consider additional coverage options. While a comprehensive car insurance policy should include liability insurance, uninsured motorist protection, medical payments coverage, and collision and comprehensive insurance, there are several other types of coverage that may be useful.
Many major auto insurance providers offer optional coverage alternatives in addition to the basic coverage of a full coverage policy. Some of these options include roadside assistance, which can cover the cost of services like tire replacements, jump starts, and towing, as well as new car replacement coverage, which can pay for a replacement if your new car is totaled during the first year or two of ownership.
Gap insurance is another option that can cover the difference between the actual cash value of your car and the amount you owe on your loan or lease on the account that it is totaled as a result of an issue covered by your policy.
Personal item coverage can also be useful, as it covers personal goods in your car that are destroyed or stolen. Additionally, separate rental car replacement coverage can pay for a rental car if your car is in the shop following a covered loss.
If you drive for a rideshare company, it’s important to check whether your insurance company provides rideshare coverage to protect you when your app is active but you aren’t currently carrying a passenger. To increase your financial security, you may want to consider adding additional insurances to your existing policy, such as gap insurance, rental reimbursement insurance, roadside assistance insurance, umbrella policies, non-owner insurance, or usage-based/pay-as-you-drive insurance.
Gap insurance
can cover the difference between the actual cash value of your car and the amount you owe on your loan or lease if it’s totaled due to an issue covered by your policy.
Rental reimbursement insurance
can cover the cost of a rental car or alternate modes of transportation while your car is being repaired due to a covered problem.
Roadside assistance insurance
can cover services like tow trucks, jump starts, fuel delivery, or locksmith services if you experience car trouble.
If you believe that the maximum limits of property damage and bodily injury liability coverage may not be enough to protect your assets in the event of a serious accident, you may want to consider an
Umbrella policy.
Non-owner insurance can provide liability coverage in the event of an accident if you don’t own a car but still occasionally drive.
Usage-based/pay-as-you-drive
Insurance can track your driving habits to provide you with savings on your coverage, but it’s important to research potential implications before purchasing this type of insurance.
In the event of an accident, liability insurance is responsible for covering costs such as medical expenses or damages to other people’s property. It’s important to consider what level of coverage is best for you, particularly when it comes to bodily injury liability limits, which are often expressed in numbers such as 100/300/100.
If you have a policy with a 100/300/100 coverage level, this means that the first number represents the maximum amount your insurance company will pay for a single person’s bodily injury claim, which is typical $100,000. The second number refers to the maximum amount your insurer will pay for all bodily injury claims in the event of an accident, which is typical $300,000 but does not exceed the per-person limit.
So, if someone requires $126,000 in medical care, you would be responsible for paying the extra $26,000, as it exceeds the per-person limit but is still within the per-accident limit. Finally, the third number in the policy represents the maximum amount your insurer will pay for property damage claims, which is usually $100,000.
It’s always best to choose the highest level of coverage you can afford, rather than simply opting for the minimum amount required by your state. If you can only afford 50/100/50 coverage, for example, then that’s still better than choosing the minimum required coverage. However, if you can afford to pay for more than 100/300/100, then it’s advisable to do so, particularly if you
own an expensive vehicle or live in an area with a high cost of living. The average cost of injuries resulting from an accident is around $52,900, so higher insurance coverage levels can provide you with greater financial security in the event of an accident.
How to understand your auto insurance needs to get affordable coverage?
When it comes to auto insurance, simply getting the minimum level of coverage required by law may not be the best decision for you. Many drivers opt for more coverage than what is mandated by their state in order to protect themselves against a range of issues beyond just minor accidents. To help determine your auto insurance needs, consider the following five recommendations:
1. Know your state laws: If you can’t afford additional types of auto insurance, you may not need them, as liability insurance is the only coverage that’s required in 47 states.
2. Know your options: There are numerous auto insurance alternatives, but it’s important to understand which types of coverage you are most likely to need. For instance, in the event that your car is damaged, do you want coverage for a rental car? Do you want an extended warranty that will cover labor and components in case your vehicle breaks down? If your car is leased, you’ll likely need gap insurance, which covers the difference between your insurer’s settlement and the amount left on your lease balance in case of a total loss.
3. Know how much money you want to spend: Once you know your state’s regulations and have evaluated your needs, you can combine the different types of auto insurance coverage into a single comprehensive policy. Make sure to test out various scenarios to determine the coverage that gives you the most sense of security in case of an accident.
4. Know your vehicle: If you couldn’t afford to buy a new car if yours were totaled, you need collision and comprehensive insurance. The value of your car is typically a factor in the decision to purchase this coverage.
5. Know about your other insurance: Other insurance policies, such as health insurance and homeowners insurance, may cover some motor accident-related expenses. For instance, if you have comprehensive health insurance, you may not need more Personal Injury Protection than what is legally required. Understanding your existing coverage can help you avoid purchasing unnecessary insurance.
To get the best possible coverage at an affordable price, it’s important to understand the factors that affect auto insurance rates, including age, the credit score (where applicable), location, driving record, and vehicle type. Obtaining quotes from multiple insurance providers can help you find the most affordable coverage for your needs.
Remember that auto insurance rates can vary greatly depending on a variety of factors, so it’s impossible to compare your rate to those of your friends or family members. By considering these recommendations and understanding your unique insurance needs, you can make an informed decision about your auto insurance coverage.
What’s the minimum car insurance you need?
If you are struggling to determine the appropriate amount of car insurance that you are required to have based on your individual needs and your state’s legal standards, the following steps can assist you in figuring out the minimum coverage necessary:
1. Research the minimum insurance requirements in your state. This may be sufficient if you have a simple car loan and limited assets.
2. Review the requirements of your lender if you have a car loan or lease.
3. Determine the value of your assets, which includes your car, savings, home, and business, in order to make an informed decision about the amount of insurance coverage you require.
What deductible should you choose?
Your deductible is the amount you pay out of your own pocket to cover car insurance claims. It is important to note that while your liability coverage does not require a deductible, both comprehensive and collision insurance policies will require you to select a deductible level.
When choosing a deductible, you typically have a range of options between $100 to $1,000. The larger your deductible, the less you will have to pay each month for insurance. Opting for a higher deductible can help lower your auto insurance premiums, provided you have enough savings to cover the deductible if needed.
Is it worth it to have liability-only coverage?
For drivers with a limited budget, liability-only insurance may be a sensible option. This type of coverage is more affordable and can provide sufficient protection in certain circumstances. For example, if your vehicle has little financial value, it may not be worth obtaining comprehensive or collision coverage.
If you have enough cash reserves to replace your car without relying on insurance coverage, you may choose to forego the higher premiums associated with full coverage insurance. As per the 10% rule, decreasing your comprehensive and collision coverage is usually recommended if the cost of full coverage exceeds 10% of the vehicle’s actual cash value.
How can I save on auto insurance?
looking for ways to save on your auto insurance as a car owner? Comparing policies from various insurers and exploring available discounts are two strategies that can help. Auto insurance costs can vary by provider and location, so it’s important to do your research to find the best rates in your area.
Some insurance companies offer more affordable coverage options than their competitors. It’s worth comparing the prices and policies of different providers to find the most cost-effective solution.
Aside from shopping around, there are other steps you can take to lower your insurance costs. One option is to assess how much coverage you actually need and purchase accordingly. You can also explore the many discounts that insurers offer, including those for good driving habits, completing defensive driving courses, low mileage, telematics, good grades, driver’s training, multiple cars, military or veteran status, and bundling policies.
Some people also choose to increase their collision and comprehensive deductibles to lower their premiums. However, it’s important to choose a deductible amount that you can afford in case of an accident or other covered event.
By following these tips, you can potentially save money on your auto insurance premiums while still having the coverage you need.
Conclusion
If you’ve been wondering about the amount of auto insurance you need, it’s recommended that all drivers carry at least 100/300/100 in liability insurance. If you can’t afford this, consider getting the highest level of liability protection possible.
To reduce your financial risk as a driver, you may want to consider getting collision and comprehensive coverage if you have a new or expensive vehicle. Additionally, if your car has outstanding debt, it may be wise to carry gap coverage.
To find affordable auto insurance that meets your needs, it’s best to shop around with multiple companies. We recommend getting three quotes from various insurance providers to effectively compare rates.