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, Minnesota law requires you to carry at least 30/60/10 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 $23 more per year to move from 50/100/50 limits to 100/300/100 limits; the cost increase is only about $43 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.
If you have more than one car, consider stacking personal injury protection coverage. If you are retired, make sure to get your PIP discount.
Minnesota’s “no-fault” insurance laws require you to purchase minimum levels of “personal injury protection” (PIP) coverage, which covers expenses related to medical costs, lost wages, replacement services (such as housekeeping), and, in case of death, $2,000 of funeral expenses. The minimum required PIP coverage is $40,000, with $20,000 allotted for medical expenses and $20,000 for non-medical expenses. You can choose among different deductible options and increase your coverage level for a small increase in your overall annual insurance premium.
If you have more than one vehicle on your policy, you can “stack” your PIP benefits. Stacking PIP limits essentially pools the PIP coverage for all insured vehicles; if you have two cars and “stack” 20/20 coverage, you have what amounts to a 40/40 level of protection. The cost of this kind of stacked coverage is very low.
If you are retired, you can ask insurers to waive coverage for the non-medical expenses portion of your PIP coverage, resulting in a slightly lower premium.
If your expenses exceed your PIP limits or reach certain specified levels, you may be able to collect from the other driver’s liability insurance if he or she is found liable. You may also make a claim if you suffer certain kinds of permanent injury, or death. Otherwise, you may not sue the at-fault party. No-fault claims must be made within six months of an accident.
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.
Minnesota requires uninsured/underinsured motorist coverage at least to the 25/50 level. 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.