How Much Auto Insurance Do You Need?
Last updated in April 2016
Insurers offer a broad range of coverage options. Some coverages are crucial, but others aren’t worth much. When evaluating any coverage, or deciding how much insurance to buy, 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. Buy higher limits if doing so is inexpensive or you have a lot of assets.
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’ll have to 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 divided 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. Some policies are written with a single limit, say $300,000, and will pay up to this limit even if only one person is injured or only property is damaged. Because of its greater flexibility, single-limit $300,000 coverage is worth somewhat more than 100/300/50 split-limit coverage.
Since your insurance not only protects your assets but also ensures financial relief for anyone you injure, Washington State law requires you to carry at least 25/50/10 liability coverage.
Because state-mandated minimums won’t protect most drivers’ assets from large claims, most drivers buy liability insurance and insure above the legal minimum. If you possess substantial assets, you have the strongest incentive to purchase substantial liability coverage: You have a lot to lose and are an attractive target for lawsuits.
Although it costs more to buy insurance with higher limits, the cost increases are often modest. As this figure illustrates, the for a policy with one car it costs on average only about $55 more per year to move from 50/100/50 limits to 100/300/100 limits; the cost increase is only about $83 to move from 100/300/100 limits to 250/500/100 limits. And for most drivers, doubling the limits of property damage coverage from $50,000 to $100,000 costs only a few dollars more per year. Most consumers consider these extra costs a small price to pay for increased peace of mind.
If you drive without liability insurance, or buy a policy with low coverage limits, most companies will treat you as a person who takes unnecessary risks and charge very high premiums to insure you in relation to the coverage you get.
If you want to protect yourself from claims in excess of $500,000, consider an “umbrella” policy, which will supplement the liability protection provided by your auto and homeowners policies. In addition to protecting you from liability claims for bodily injury and property damage, an umbrella policy will protect you against suits for other types of injuries—such as libel, slander, defamation of character, false arrest, and invasion of privacy—which are not covered by your auto or homeowners policies. Before selling you an umbrella policy, insurance companies will require you to increase the liability coverages in your auto and homeowners policies to the maximum offered.
Buy collision and comprehensive coverage with high deductibles if your car’s cash value is more than $3,000 or so; otherwise, consider declining them.
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 you to purchase them.
Collision and comprehensive coverage will pay out only up to the actual cash value of your car. If you want to cover additions to your car—video screens, an upgraded sound system, a special paint job, or other features—you will have to pay an extra premium.
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 per year 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.
Both collision and comprehensive coverage 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 $3,000 or so.
Buy medical payments or personal injury protection coverage at low limits.
“Medical payments” coverage takes care of medical bills if any member of your family is injured in an auto accident, or your funeral expenses if death results from such an accident. You can collect these payments if you or a family member is driving a car, is a passenger in a car, or is struck by a car. Medical payments coverage also protects passengers who ride in your car. Payment is made regardless of fault.
If you want a broader type of coverage that will compensate you for wage loss in addition to medical expenses, you can instead purchase “personal injury protection” (PIP) coverage.
When considering whether to buy medical expense or PIP coverage, and what limits to get, keep in mind that medical payments coverage is relatively inexpensive and that increasing limits on this coverage is also inexpensive. PIP coverage costs more, typically more than $125 per year for a modest $10,000 of coverage. But medical costs that you could collect from these policies could be collected by anyone who has health insurance coverage. Lost wages might be at least partially compensated under disability insurance. It’s reasonable to buy a minimal amount of medical payments coverage to fill in possible gaps in your health insurance and to help cover out-of-pocket medical expenses for other passengers. But beyond that, you may do better to spend your money on beefing up your health or disability insurance, which would protect you from any disease or injury that might befall you, not merely from injuries that involve automobiles.
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 usually are compensated by that driver’s insurance company. But many drivers are uninsured, and even insured drivers often are underinsured for large losses. Uninsured/underinsured motorist coverage fills this gap and protects you from hit-and-run drivers. Although insurance companies must offer this coverage, you’re not required to buy it.
All the reasons that argue for higher 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 $20 to $60 per year for each car on your policy. Since the additional premium over time is likely to greatly exceed any benefits you can collect, our advice is to decline it.
Consider declining towing and road service coverage if it’s expensive.
Some insurance companies offer only towing coverage; others both towing and road service coverage together. Most companies offer these coverages for about $10 to $20 per year, and a few companies charge nothing for it. Under many policies, this optional coverage will reimburse you only for $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. And some companies try to market themselves as offering better coverage than their competitors by touting these optional coverages as exclusive offerings. Carefully evaluate any optional coverage using a cost-benefit approach.
As an example, most companies now offer “accident forgiveness.” With this option, if you have an accident your premiums won’t change. Considering that your premiums might increase by 25 percent to more than 100 percent, depending on the company, as a result of having just one at-fault accident, 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 $100 or more per year to buy it.
When you consider what the insurance companies are offering customers, accident forgiveness actually 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, sure, go ahead and take it. But if it costs more to get it, 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.