Regardless of which state you live in, the law says you have to carry minimal auto liability insurance. Whether you choose to get additional coverage is up to you. As you evaluate your auto insurance options, you should consider three major factors:
- Drivers – Are you looking for coverage for yourself or for other drivers as well, and are any of them high-risk (such as teen drivers)? Do any of the drivers have a history of accidents or high-risk behaviors such as speeding?
- State Laws – Insurance coverage and regulations are a matter of state law, and minimum coverage expectations vary by state. You may be required to carry a particular type of coverage in one state that does not apply to another. Check the website of your state insurance commission for details, or speak to a knowledgeable local agent.
- Finances – What sort of auto insurance payment can you afford, and how much can you afford to lose should an accident occur? In general, the more assets you have to protect, the higher your liability coverage should be.
Let’s look at the different types of auto insurance that you can purchase.
- Liability/Property Damage – This covers property damage from an accident that is your fault. State minimums vary, but they probably will not cover the costs of you totaling somebody else’s car.
- Liability/Bodily Injury – This covers medical expenses for those injured in an accident where you were at fault. State minimums can be at $20,000, with upper limits around $300,000-$500,000.
If you have significant assets, even these limits are not enough to stop you from losing these assets through a lawsuit. Ignore the state minimum and scale your liability insurance according to your assets. In plain language, if you cannot afford insurance payments to cover the amount of stuff that you own, you own too much stuff.
High-risk drivers will drive the cost of your liability premiums up, but it is not worth losing your house just to skimp on premiums. On the contrary, having high-risk drivers makes higher liability coverage even more important.
- Medical Payments (MedPay) and Personal Injury Protection (PIP) – PIP covers medical costs related to you and your passengers in any auto accident without regard to fault, and can include expenses other than medical bills, such as loss of income and funeral expenses. MedPay coverage strictly covers medical expenses only, and may overlap with your existing health insurance. PIP has a deductible; MedPay does not.
Some states mandate one or the other, and they may overlap with your existing health insurance. Check with the laws in your state to see what is mandatory, or if your health insurance coverage makes them both unnecessary. Make sure to compare costs and coverage, who is covered and for what amount, who pays first in case of overlapping coverage, and if there are limitations (such as lawsuit threshold values).
- Comprehensive and Collision – This coverage may be required if you have a leased car or an outstanding car loan. Comprehensive policies handle miscellaneous auto damage not related to an accident, such as flood, fire, and theft. Collision policies cover the damage to your car in an accident, with the amount mandated by the type of car you drive.
You will need to decide on a deductible amount. As a rule of thumb, if the payments are more than 10% of the car’s value, you should consider dropping collision coverage.
- Uninsured/Underinsured Motorist Coverage – If you are in an accident that is the fault of an uninsured or underinsured driver, this coverage will plug the gap in their coverage and your actual costs. In many states, it is a reasonably inexpensive policy compared to what is offered. Check the coverage limits (bodily injury and/or property damage).
In summary: verify what coverage is mandated in your state; do not skimp on liability coverage; set your coverage and deductibles in line with your financial situation; and consider additional coverage as it best fits your situation. If you don’t need it, don’t buy it – but don’t skimp on what you do need to protect yourself and your family.