A few months ago, I talked about life insurance. Now it’s time to discuss car insurance. Auto insurance is a requirement in order to drive in most states. Most states have coverage minimums, but those minimums may not offer enough protection in a serious accident. For example, California requires 15/30/5 liability coverage. If I were to hit a motorcyclist, that wouldn’t even begin to cover it. To protect yourself, use the following recommended coverage limits when buying a car insurance policy.

Auto Liability
Liability policies offer protection for the person you hit when you’re at fault. They are described as a set of three numbers, for example 15/30/5. That’s injury coverage of $15,000 per person, with a total of $30,000 per accident. The last number is the limit for property damage per accident.

If you’re a renter without assets and an income below $75,000, then a 50/100/50 policy is ample coverage.

If you’re a homeowner, a high-earner, or have assets, then opt for 100/300/100 coverage. In addition, your homeowner’s policy may offer some coverage. If you have assets of more than $300,000, you should consider supplementing your coverage with a million dollar umbrella policy, which will usually cost less than $500 a year and cover auto accidents, injuries on your property, a lawsuit, and other possible events.

Personal Injury
The personal injury section of the policy covers you and your family members in an accident. If you have health insurance, then personal injury coverage is usually unnecessary.

Uninsured/Underinsured Motorist
Although it’s optional, you should always include uninsured motorist coverage in your car insurance policy. Many people drive without insurance, or without enough insurance, so you need to protect yourself. Uninsured coverage is usually very reasonable for coverage up to $100,000.

You can also add a collision deductible waiver, which waives your deductible when you claim uninsured motorist coverage. It’s usually about $8 a year, so definitely worth it.

Comprehensive and Collision Coverage
If you have a car loan, then comprehensive and collision coverage are required by the lienholder. Collision covers damage to the car in an accident. Comprehensive covers damage to the car from non-accidents, like a tree limb falling on the hood. You don’t request a limit, but rather the coverage is determined by the value of the car.

Many people continue to pay comprehensive and collision long after it’s stopped being worthwhile. As a rule of thumb, drop comp and collision if the annual cost is more than 10% of the current value of the car. For example, if the coverage is more than $300 a year for a $3,000 car, drop it.

Rental Reimbursement
Rental reimbursement covers all or some of the cost of a rental car if your car is undrivable or in the shop for covered repairs. In most cases, the rental will be covered by the insurance of the person who hit you, but you may need to tap rental reimbursement coverage if you’re at fault or involved in an accident with an uninsured motorist. It’s cheap, but may not be necessary.

Geico and a few other insurers offer towing. You’d probably be better off joining AAA for $50 a year because of the additional membership benefits it provides.

Car insurance doesn’t have to cost a lot of money, but you shouldn’t buy the cheapest policy you can find. Instead spend a few dollars more to buy a policy that offers the level of coverage you need. Use a company like NetQuote to find competitive rates for your car insurance policy. You don’t want to skimp on liability to save a few bucks, and then find your assets drained by an accident lawsuit because your coverage was too low.


19 Responses to “Auto Policy Basics: How Much Car Insurance Do You Need?”

  1. Carnival of Personal Finance #152 — Money Under 30 on May 12th, 2008 6:42 am

    [...] daily lives, can help us improve our personal finances, while Aryn from Sound Money Matters asks How much car insurance do you need? The Happy Rock discusses simplifying your finances, and Super Saver from My Wealth Builder tells [...]

  2. Super Saver on May 12th, 2008 8:23 pm

    I dropped my Uninsured/Underinsured coverage many years ago because I understood it to be secondary to my medical insurance coverage, and thus, wouldn’t pay unless the medical insurance didn’t cover it. Since I have pretty good medical insurance, it seemed redundant to have Uninsured/Underinsured coverage.

    I think a lot of people mistakenly think, as I originally did, that it covers collision damage by an uninsured/underinsured driver, which it doesn’t in my state.

    On the other hand, I carry the maximum liabilty coverage, because I want to protect my assets, should I be at fault in an accident.

  3. Brandon on May 13th, 2008 9:56 pm

    In an injury involving a vehicle, Uninsured and Underinsured coverages are always primary over your medical/health insurance. This means that Uninsured and Underinsured coverages will pay first (if at all), up to the limits specified by your policy, before any benefits are payable by your medical insurance. Typically, medical benefits will be claimed, then the medical insurance company will attempt to recover (“subrogate”) their expenses from the auto insurer that provides the un/underinsured coverages.

    In general, if you are comfortable paying the deductibles, coinsurance, and any other out-of-pocket costs in the event of a medical emergency, it doesn’t make a whole lot of sense to be doubly-insured.

  4. Jack Thomas on November 26th, 2009 5:50 am

    Your statement… “If you’re a renter without assets and an income below $75,000, then a 50/100/50 policy is ample coverage.”

    …could inadvertently cause great financial harm to another person in the event someone whom is a renter, making less than $75,000 with no assets causes a serious injury to another party whom sues and receives a judgement in excess of the policy limits for one simple reason:

    Your advice does not take into consideration your future income or wealth creation ability. In other words if you do not have sufficient insurance coverage for an accident you become legally liable for you might lose out on future opportunities, including schooling, employment, business or otherwise simply because you were forced to use your personal assets to pay for claims that your insurance did not cover. Or worse you were ordered to have your wages garnished for damages in excess of your insurance coverage limits or had to file bankruptcy causing your credit be ruined for many years in the future, all because you did not have “enough” insurance coverage to protect your future assets.

  5. Brianna Lee on October 1st, 2010 5:06 am

    i use our local Car Insurance and it is quite great*”*

  6. jack@auto transport on June 19th, 2011 12:36 pm

    I have been searching for several insurance companies on internet and get quoted, as I am a young drivers, I not get a pretty fair prices there. And I found on online articles that driver at my ages would get a pretty expensive prices due to insurance policy about young drivers habits. can you give me a tips how to get a fair prices? better to go to local auto insurance in my area or continue to get quoted online?

  7. Aryn on June 20th, 2011 11:02 am

    Compare online. There aren’t many local insurance companies left! I would particularly look at Mercury and Geico. They tend to have the lowest rates for young drivers.

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