How Much Car Insurance Do I Need?

By KBB Editors 01/04/2022 4:00pm

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Drivers in nearly every state must maintain a minimum amount of car insurance to drive legally. But there are exceptions. And each state decides what types of coverage it requires and what the minimum policy limits will be.

There’s no one-size-fits-all solution to purchasing coverage. The right amount for you depends on your state’s requirements and how much protection you want. While no one wants to pay for coverage they don’t need, you don’t want to find out that you’re underinsured when it’s too late.

In this article, we’ll explore the available types of coverage and factors to consider to help you decide on the right amount for you.

Is Car Insurance Required?

Every state except New Hampshire and Virginia requires drivers to have liability coverage, which pays for other people’s injuries and vehicle damage if you cause an accident. Although New Hampshire and Virginia don’t require drivers to carry insurance, they do have financial responsibility laws. If you don’t have car insurance and you’re responsible for an accident, you must be able to pay for losses that result from the crash.

What Happens If I Drive Without Insurance?

Penalties for driving without insurance vary based on where you live and may include:

  • Fines
  • Suspension of your license and/or vehicle registration
  • Vehicle impoundment
  • Suspension or surrender of your license plates
  • SR-22 filing requirement
  • Jail time

If your license or registration is suspended, you may need to pay a fee to get them reinstated, in addition to fines you may be responsible for. And if your vehicle is impounded, you’ll have to pay a release fee to get it back.

How Much Auto Insurance Do I Really Need?

You need at least enough coverage to meet your state’s minimum requirements to drive legally. If you’re not sure what they are, check with the department of motor vehicles or your insurance agent.

But keep in mind that state minimum insurance requirements are notoriously low. And they don’t typically provide adequate protection if you’re in a serious accident. Plus, your state may not require certain types of coverage that can help protect your finances after accidents and other incidents.

Having the right types of coverage and adequate policy limits is essential to preserving your financial health. “The more money you have, the more insurance you need,” says Shane Page, president of Piedmont Insurance Associates, an independent insurance agency in North Carolina.

If you don’t have enough coverage and someone sues you, you might have to dip into your savings or other assets to cover accident-related expenses.

Types of Car Insurance

When you buy an auto insurance policy, there are five common types of coverage you can include:

  • Liability. This type of coverage is required in every state except New Hampshire and Virginia. It pays for injuries and property damage you cause to other people if you’re at fault in an accident. It doesn’t cover your injuries or vehicle repair costs.
  • Collision. This insurance covers damage to your car if it’s in a crash.
  • Comprehensive. It covers damage to your vehicle that occurs from something other than a crash, such as severe weather, vandalism, falling objects, animals, and more.
  • Personal Injury Protection (PIP) / Medical payments. Both of these coverages help pay for injuries you and your passengers sustain during an accident. Availability varies by state.
  • Uninsured/underinsured motorist (UM/UIM). Even though having insurance is the law in nearly every state, some people are still without coverage. UM/UIM helps protect you if you get hit by one of them, and they don’t have sufficient coverage to pay for your expenses.

Understanding Liability Insurance and Mandatory Minimums

Liability coverage includes three limits that are often written like this: 10/20/10. The first number represents the policy’s per-person bodily injury limit. The second number is the per-occurrence bodily injury limit. And the third number is the property damage liability limit. These amounts are the most an insurance company will pay after an accident.

Using the example above, the insurer will pay up to $10,000 for a single person’s injuries and up to $20,000 for all injuries. No matter how many people are injured, they will pay up to $10,000 in vehicle repairs.

Each state has its own minimum coverage requirements. Check with the DMV to find out what they are where you live.

How Much Liability Insurance Do I Need?

Buying the minimum amount of liability coverage your state requires may seem like a good way to save money. But it could cost you. A state’s minimum insurance requirement is rarely enough to pay for injuries and vehicle damage after a serious accident. If you cause an accident and don’t have enough coverage, you may have to pay for accident-related expenses out of pocket.

According to Page, most people have liability limits of 100/300/50, which is better than the state minimum. But it may still not be enough. “Even if you’re a middle-class family with a little bit of equity in a house and a retirement fund, most families should have at least $1 million [of coverage],” he says.

You can get additional coverage by increasing your liability limits. Or you can purchase an umbrella policy, which Page says is a better option because:

  • It increases your coverage under both your home and auto insurance policies.
  • It’s becoming more common for carriers to extend the coverage to your uninsured/underinsured motorist coverage as well.
  • It’s relatively inexpensive.

Page recommends that people with a net worth of up to $10 million have insurance coverage that’s at least equal to their assets. “If you want to be extra cautious, [maintain coverage that’s] double your net worth until you get to $10 million in coverage,” he said.

What are Minimum Levels of Liability Car Insurance Best For?

Minimum levels of liability coverage aren’t good for much, but it’s better than having no insurance at all. If you don’t have any assets, you may face little financial risk by maintaining your state’s minimum requirements. But if you have any assets to protect, you could be putting them at risk. The minimum is almost never enough to pay for a new car or serious injuries after an accident.

How to Determine My Needs

When buying auto insurance, there are multiple factors to consider before selecting coverage, including:

  • Your state requirements. At a bare minimum, you must have enough insurance to drive legally in your state.
  • Your budget. It’s important not to skimp on the coverage you need to save money. “But buying a policy that you can afford is better than buying a policy that will lapse because you can’t afford it,” says Page.
  • Your assets. In general, it’s advisable to have coverage that’s at least equal to your net worth.
  • Your financial capacity. Collision and comprehensive coverage are optional in every state. But if you can’t afford to repair or replace your car, these coverages can be invaluable. “If you could afford to replace the car, then you have the luxury of deciding whether you want to [spend] a couple hundred bucks a year or take the risk [of not maintaining coverage],” Page said.

An insurance agent can help you assess your risk, evaluate your financial situation and select the coverages that best meet your needs.