Insurers offer a broad range of coverage options. Some coverages are crucial, but others aren’t worth much. Keep in mind that the purpose of insurance is to protect you from losses you can’t afford to cover yourself. When you buy more insurance than you need, or insure against small risks, you are wasting money.

Buy liability coverage with at least 100/300/50 limits.

Liability coverage compensates others if you injure them or damage their property, and pays for legal fees. If you drive without it, your home, your savings, and your future wages are vulnerable.

Auto insurance policies will pay for “bodily injury” claims (medical and rehabilitation expenses, wage losses, and pain and suffering) and “property damage” claims (damage to someone else’s car, building, or other property). Your liability coverage protects you, your family members, and anyone else who drives your car with your permission.

When you buy liability coverage, you buy protection up to payout limits; if you are found liable for damages that exceed the limits for which you’re insured, you must pay the difference out of pocket. Think about the limits you can live with, keeping in mind that you’ll pay higher premiums for higher limits.

Auto insurers describe policy limits as a set of three numbers, each representing a multiple of $1,000 separated by diagonal lines. For example, a 100/300/50 policy pays a maximum of $100,000 for bodily injury to one person, a maximum of $300,000 for total bodily injuries when more than one person is hurt in an accident, and a maximum of $50,000 for property damage in a single accident.

Since your liability insurance not only protects your assets but also ensures financial relief for anyone you injure, Delaware, New Jersey, and Pennsylvania laws require drivers carry at least a minimum level of liability insurance. The minimums are 25/50/10 in Delaware and 15/30/5 in Pennsylvania. New Jersey’s minimums vary because two types of insurance policies are available: “Basic” insurance is a bare-bones policy that requires only $5,000 in property damage liability coverage and no bodily injury coverage; the “Standard” policy requires liability limits of at least 25/50/25.

Because these minimums won’t protect most drivers’ assets from large claims, most insure well above the legal minimum—100/300/50 is most common. Although it costs more to buy insurance with higher limits, the cost increases are often modest.

If you possess substantial assets, you have the strongest incentive to purchase substantial liability coverage: You have much to lose and are an attractive target for lawsuits. Consider an “umbrella” policy, which supplements the liability protection provided by your auto and homeowners policies with coverage for other risks, such as libel, slander, defamation of character, false arrest, and invasion of privacy.

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Buy collision and comprehensive coverage with high deductibles.

Collision coverage pays to repair or replace your car following an accident. Comprehensive coverage pays for damage from almost all other causes—vandalism, theft, fire, weather, and collision with animals. These coverages aren’t required by law, but if your vehicle is financed your lender may require them.

Each type of coverage is sold with a deductible—the amount you agree to pay out of pocket before you can collect from the company. You’ll save a considerable amount of money by taking a high deductible—for example, on average, buying a policy with a $1,000 deductible will save you 15 percent annually compared to buying one with a $250 deductible, and taking a $2,000 deductible will save you about 25 percent per year. Take as high a deductible as you can afford to lose without seriously disrupting your finances. In addition to saving money on premiums, you should avoid making small claims anyway, since making a claim might lead a company to dramatically increase your rates.

If your car is worth less than $5,000 or so, consider declining collision and comprehensive coverage.

These insurance features become increasingly wasteful as your car ages. As your car’s value decreases, the price of insuring it declines—but only during the first few years of the car’s life. The costs of collision and comprehensive coverage for a 10-year-old car—for which an insurance company would pay almost nothing in the event of a complete loss—are about the same as for a six-year-old car. So consider dropping collision and comprehensive coverage in exchange for a big premium discount if your car is worth less than $5,000 or so.

Buy medical benefits or personal injury protection coverage at low limits.

In Delaware, drivers are required to purchase “personal injury protection” (PIP) coverage with a limit of at least $15,000 per person involved in an accident and $30,000 per accident. Under this coverage, your insurance company will cover medical expenses and loss of wages resulting from an auto accident for you, your family members, and your passengers, regardless of who is at fault.

New Jersey drivers are also required to purchase PIP coverage. If you choose a “Basic” policy, you get PIP coverage for medical expenses up to $15,000 per person per accident and up to $250,000 for “permanent or significant injury.” If you take a “Standard” policy, you have a number of choices. You can take coverage limits for medical expenses as low as $15,000 and up to $250,000, regardless of whether there is “permanent or significant injury” (there is mandatory coverage up to $250,000 if there is “permanent or significant injury”). You pay a higher premium to cover lost wages and to pay someone to perform tasks you ordinarily perform yourself, such as housecleaning and laundry. With the Standard policy, you have the option of taking a deductible, which means you won’t collect on your PIP coverage until expenses exceed the deductible. You can also save money by making your family’s health insurance plan the primary payer of medical expenses in the event of an accident.
Pennsylvania drivers are required to purchase at least $5,000 of “medical benefits” coverage. Under this coverage, your insurance company will pay medical expenses for you, your family members, and your passengers injured in an auto accident, regardless of fault. You can buy a higher coverage limit for medical benefits, and purchase related coverages for income loss, accidental death benefits, and funeral expenses. As an alternative to buying all these related coverages separately, you can purchase “combined first-party benefits” coverage, which includes medical benefits, income loss, accidental death, and funeral expenses.

Before buying more than your state’s minimum medical expense and PIP coverage limit, keep in mind that most of the medical expenses paid for by medical benefits coverage or PIP coverage would be covered by the injured party’s regular health insurance. If you and your family have health insurance, medical benefits coverage or PIP coverage will fill in gaps in health insurance (deductibles, copayments, etc.) and cover medical expenses for your passengers who may not have health insurance.

It’s reasonable to buy a minimal amount of coverage to fill in possible gaps in your health or disability insurance policies, and to help cover out-of-pocket medical expenses for other passengers. But beyond that, you may do better to beef up your liability coverage or health insurance policy to protect you and your family from any disease or injury that might befall you, not merely from injuries that involve automobiles.

Buying a limited-tort policy instead of a full-tort policy will save you a lot of money.

New Jersey and Pennsylvania are called “choice” no-fault states. “No-fault” refers to the fact that, if you live in one of these states, your own auto insurance coverage protects you regardless of who is at fault in an accident.

No-fault laws were established to help ensure timely reimbursement of medical costs for all parties involved in an accident, and to reduce the incidence of lawsuits related to auto accidents. According to New Jersey and Pennsylvania law, the coverages for personal injury protection, medical payments, and loss of income (described in the previous section) will provide benefits to you and your passengers in the event of an accident, regardless of who was at fault.

In both New Jersey and Pennsylvania (and other states that have no-fault laws), the guarantee that benefits will be paid regardless of fault is accompanied by a requirement to relinquish some portion of your rights to sue the other party. So when you purchase an auto insurance policy in New Jersey or Pennsylvania, you will have to choose between buying “full-tort” or “limited-tort” coverage.

Delaware is what is known as an “add-on” no-fault state, where no-fault coverage is added on to traditional tort coverage. In other words, if you are injured in an auto accident, your rights to sue the other party (and vice versa) cannot be limited. Delaware residents don’t have to decide between a full-tort or limited-tort policy.

With full-tort coverage in New Jersey and Pennsylvania, you retain your unlimited right to sue the at-fault party in an accident. With limited-tort coverage, your rights to sue for pain and suffering, or non-economic losses, are restricted, unless your injuries reach a threshold of severity.

It’s difficult for us to recommend either full- or limited-tort policies. On one hand, you’ll save a ton of money by going with a limited-tort policy: A full-tort policy in New Jersey usually costs 15 to 25 percent more than the limited-tort option; in Pennsylvania, the full-tort option costs about 15 percent more. And limited-tort policies benefit all consumers by eliminating lawsuits, which lowers premiums for everyone. But, on the other hand, a limited-tort policy essentially limits your ability to seek full compensation for pain and suffering—even in accidents caused by another driver’s negligence.

Buy uninsured and underinsured motorist coverage at the same limits as your liability coverage.

If you are in an accident and the other driver is at fault, you are usually compensated by that driver’s insurance company. But many drivers are uninsured, and even insured drivers are often underinsured for large losses. Uninsured/underinsured motorist coverage fills this gap and protects you from hit-and-run drivers. All the reasons that argue for higher-than-minimum limits on liability coverage—which protects someone else—also argue for high limits on uninsured and underinsured motorist coverage—which protects you. The cost of increasing your limit for uninsured and underinsured motorist coverage from minimum limits to 100/300 is usually small.

Don’t buy rental car reimbursement coverage.

For an additional premium, most insurers will broaden your collision or comprehensive coverage so that it pays for a rental car while your own car is being repaired.

Although most insurers push this add-on, the problem is that even a modest level of coverage—typically $30 per day with a limit of $600 per claim—usually costs $25 to $75 per year for each car on your policy. Since the additional premium over time is likely to greatly exceed any benefits you can collect, decline it.

Consider declining towing and road service coverage if it’s expensive.

Some insurance companies offer only towing coverage; others bundle towing and road service coverage together. Most companies offer these coverages for about $10 to $25 per year, and a few companies charge nothing for it. Under many policies, this optional coverage will reimburse you for only $25 per claim, but for $3 or $4 more per year you can get coverage for up to $75 per claim. Though towing and road service coverage is inexpensive, joining AAA will be a better deal if you use other club benefits.

Don’t fall for marketing gimmicks disguised as desirable policy features.

Many companies offer features such as “accident forgiveness,” “vanishing deductibles,” and other seemingly desirable options that really aren’t worth much but sometimes cost a lot more. Carefully evaluate any optional coverage using a cost-benefit approach.

As an example, with an accident forgiveness policy provision, if you have an accident your premiums won’t change. Considering that one at-fault accident might cause your premiums to increase by 25 percent to 100 percent or more, this type of coverage plan might seem like a pretty good deal.

But most companies charge an additional premium for accident forgiveness (and most other advertised add-ons), and with some companies you pay $150 or more per year to buy it.

When you consider what the insurance companies are offering customers, accident forgiveness is a somewhat bizarre option: Companies are offering you regular insurance against losses and claims you might sustain because of an accident, and also offering insurance against the risk of them jacking up your rates if you actually have an accident.

Because many of these plans don’t even take effect until drivers have had an accident-free policy with the insurer for five years, policyholders end up paying hundreds of dollars in extra premiums before they can benefit from the plan—and they would benefit then only if they have an accident.

So is it worth the extra cost? Well, if it’s free or nearly free, go ahead and take it. But if it costs more, keep in mind that if you have a clean driving record you probably won’t have an accident that would raise your premiums for a long time, if ever. If you have a checkered driving history, the chances are higher that you will have a future accident, but the price you’re already paying—plus the extra price for accident forgiveness—will be much higher than what a good driver pays. You have to decide whether even a substantial increase in premiums as a result of an accident or accidents would be a catastrophe. If not, don’t insure against it; insurance is to protect you from catastrophes.