How Much Auto Insurance Do You Need?
Last updated April 2020
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’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.
Since your liability insurance not only protects your assets but also ensures that there will be financial relief for anyone you may injure, California law requires drivers accept a minimum level of financial responsibility. You can meet this obligation either by carrying at least 15/30/5 liability insurance or by posting a $35,000 surety bond with the Department of Insurance.
Because these minimums won’t protect most drivers’ assets from large claims, most insure well above the legal minimum—100/300/50 coverage 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 a lot to lose and are an attractive target for lawsuits. Consider an “umbrella” policy, which will supplement 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.
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 you to purchase 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 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.
If your car is worth less than $3,000 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 $3,000 or so.
Buy medical payments 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 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.
Most of the expenses that would be paid by your medical payments coverage will be paid by your family’s health insurance policy. Since medical payments coverage is relatively inexpensive, it is reasonable to buy a minimal amount of 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 liability insurance or on a more comprehensive 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.
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. 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 $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.