When you shop around for car insurance online (and you should be every six months), you’ll be faced with a lot of dropdown menus.
Your potential provider will want to know precisely how much of these coverages you’d like:
- Property damage liability.
- Bodily injury liability.
- Collision.
- Comprehensive.
- Towing and labor.
- Uninsured motorist bodily injury (UMBI).
- Uninsured motorist property damage (UMPD).
- Personal injury protection (PIP).
- Gap insurance.
- Rental reimbursement insurance.
Sometimes, they’ll also ask about special types of insurance like:
- Usage-based insurance (UBI).
- Classic car insurance.
And more. Now, most providers will give you a description of what these cover, but that doesn’t always help you decide how much you need.
Determining the precise amount of insurance you need is a worthwhile exercise. Once you find your “goldilocks zone,” you’ll save hundreds per year and ensure that you’re not over or underinsured in any particular area.
I know it sounds like hyperbole, but take it from me: purchasing the right amount of coverage also relieves a lot of unseen stress.
So let’s reach that goal for you. How much of each type of insurance do you really need?
What’s Ahead:
Property damage liability (PDL)
Property damage liability insurance covers the other drivers’ bills when you cause an accident. That’s why it’s required in 48 out of 50 states; it makes the roads safer for everyone.
Before discussing how much PDL you need, we need to cover bodily injury liability, since they’re usually bundled together.
Bodily injury liability (BIL)
If PDL covers the other person’s stuff, BIL covers their injuries and injury-related expenses, such as hospital bills, lost wages, legal fees, even funeral expenses.
PDL and BIL are often expressed together in a three-number format like this:
BIL per person | BIL per accident | PDL per accident
For example, here’s the minimum amount of insurance that all Georgians need to carry, known colloquially as “state minimums”:
$25,000 | $50,000 | $25,000
Or
25 | 50 | 25
Keep in mind that state minimums are not a recommendation; just a minimum to drive legally. So how much do you really need?
Well, let’s examine what liability insurance protects. It doesn’t protect you or your car; it protects your net worth. If you have a PDL of $25,000 and you cause $60,000 in damage during an accident, the other drivers can sue you for the remaining $35,000. However, if you don’t have $35,000, there’s much less incentive to sue you.
But if you have a high income, valuable assets (homes, cars, etc.) then the other drivers are much more likely to hire “ambulance chasers” and come after you since they know you can pay and pay quickly.
Liability insurance protects your assets. It has nothing to do with the value of your car, but rather, the damage your car can potentially do. Bluntly speaking, the more “sue-able” you look, the more liability insurance you might want or need.
To help you decide, I’ve broken down liability insurance into three profiles. Choose whichever fits you best, or something in-between!
State minimums:
- I’m on a tight budget.
- I drive extremely safely and am never distracted.
- I rent and have student loans and other debt; I don’t look particularly “sue-able.”
25 | 50 | 25:
- I’ve caused some minor fender benders before.
- I have some positive net worth I’d like to protect.
- I’d like some peace of mind beyond state minimums.
50 | 100 | 50 or higher
- I’ve caused a major accident before.
- I tend to drive distracted by my kids, phone, or passengers.
- I have a high net worth, including income and assets.
Finally, it’s worth mentioning the two states that don’t require any auto insurance. Virginia lets you opt-out of coverage if you pay the state a $500 fine, and New Hampshire doesn’t even impose a fine for driving uninsured (yikes).
If you live in either state, the takeaway is this: you need liability plus supplementary uninsured motorist protection to safely drive in your state (more on the latter later).
Collision
Collision insurance covers damage to your car if you hit something. It also covers damage if you’re hit by an uninsured or underinsured motorist and don’t have uninsured/underinsured motorist protection. Lastly, but crucially, it covers you if you’re the victim of a hit-and-run.
If you crash your car and you don’t have collision insurance, you’re paying out of pocket. Remember, liability insurance never covers your stuff.
So how much collision insurance do you need?
Unlike PDL, there aren’t “levels” of collision coverage. You either have it or you don’t; your only choice is your deductible. Your “limit” is the Actual Cash Value (ACV) of your vehicle. If the cost of needed repairs exceeds the value of the vehicle, your provider will declare it “totaled” and just cut you a check for the ACV minus your deductible.
If you lease or finance your vehicle, the dealership or your lender will require you to have both collision and comprehensive insurance. This prevents you from going underwater with the loan. Typically, the amount of coverage your lender requires is fine.
But if you own your car, the question stands. How much collision coverage is enough?
Generally, if your car isn’t worth too much, you may not need much collision coverage if any. To find out:
- Determine your car’s True Market Value using Edmunds’ free tool.
- Subtract a sample $1,000 deductible.
- Subtract $300 (the average cost of collision insurance for a six-month policy).
This figure is the maximum amount your collision coverage could payout in the event of an accident, factoring in your deductible and the cost of coverage. If it’s a big number, you might want to purchase collision coverage since it’ll pay out much more than it costs. If it’s small or even negative, collision coverage might not be worth it.
If you’re unsure, here are a few tie-breakers.
You may want collision coverage if:
- You drive a new car and want to keep it in good condition.
- You drive a luxury car with expensive replacement parts (Mercedes, BMW, etc.)
- Your friends would describe you as a not-so-great driver.
- You drive on icy roads in the winter.
- The loss of your car would disrupt your income.
You may not need collision coverage if:
- You drive an old car or a low-value “beater” that you don’t mind scraping up or losing.
- You can afford to replace your car out of pocket.
- Your income isn’t tied to your access to a vehicle.
- Your friends would describe you as a skilled or careful driver.
- You’ve never caused an accident and you never drive distracted.
Once you’ve picked a level, what deductible should you choose?
Your deductible is the amount you have to pay before your insurance kicks in. For example, if you have a $1,000 deductible on your collision coverage and you file a claim for $2,500 worth of damage, your provider will cut you a check for $1,500. Naturally, the higher the deductible, the lower your monthly premiums.
Deductibles can range anywhere from $100 to $2,500, and I personally recommend that you choose from two options right in the middle: $500 or $1,000.
Choose a $500 deductible on your collision coverage if you:
- Lack a $1,000 emergency fund for unexpected repairs.
- Don’t mind paying a few extra bucks per month for additional peace of mind.
Choose a $1,000 deductible on your collision coverage if you:
- Have plenty of savings to pay for repairs after an at-fault accident.
- Would prefer to lower your monthly premiums.
Comprehensive
If collision covers “accidents,” comprehensive covers “incidents,” i.e. any damage your car sustains that isn’t the direct result of an auto collision.
Examples of “incidents” covered by comprehensive insurance typically include fire, hail damage, theft, vandalism, hitting a deer, getting hit by a deer, and damage from falling debris.
Comprehensive insurance is relatively cheap, costing around $30 per month. But you still may not need it at all. How can you decide?
Again, if you lease or finance your car, your lender will require you to purchase both collision and comprehensive insurance. Understandably, they want to protect the asset as long as it’s legally theirs. Once you own the car, it’s up to you.
To determine if you need comprehensive insurance, ask yourself the following question:
How safe is your car when it’s parked?
If your car is a “garage queen” that spends most of its time covered and safe from nature and hoodlums, you probably don’t need comprehensive insurance. But, if your car is parked outside in an area with inclement weather or high crime, comprehensive insurance may be a good investment.
Remember, however, that comprehensive doesn’t cover hit-and-runs, collision does. So if you street park your car at night, especially in areas with a lot of bars (and thus drunk drivers), you may want to pony up for collision insurance.
Here’s a summary of comprehensive coverage.
You may want comprehensive coverage if:
- You park your car in a high crime area.
- You drive one of the Top 10 Most Stolen Cars in America.
- You park your car under old trees.
- You live in an area with inclement weather (hail, earthquakes, tornadoes, etc.).
- You park near or below a construction site.
You may not need comprehensive coverage if:
- You don’t mind your car getting dinged up by nature and bad luck.
- You park your car under a shelter, like a canopy, garage, or parking deck.
- You park your car somewhere safe.
- You don’t drive rural roads with lots of animals.
Now, how about that comprehensive deductible? As with collision, I recommend two choices right in the middle. The
Choose a $500 deductible on your comprehensive coverage if you:
- Tend to leave your car in high-risk areas for crime or natural disasters.
- Don’t mind paying a few extra bucks per month for additional peace of mind.
Choose a $1,000 deductible on your comprehensive coverage if you:
- Have plenty of savings to pay for emergency repairs.
- In the case of theft, don’t mind getting a check for $1,000 less than your car’s worth.
Liability, collision, and comprehensive are the three most basic types of auto insurance. Once you’ve decided how much of each you need, you’re mostly done; now we just have to cover a few special forms of insurance.
Towing and labor
Towing and labor coverage will help cover the costs of towing and roadside labor (i.e. tire changes, emergency fuel, etc.)
There are two reasons I recommend that you skip towing and labor coverage:
- You might already have it. Check your credit card benefits; a lot of travel rewards cards these days include free towing and labor coverage for your personal vehicle.
- It’s cheaper elsewhere. An annual AAA membership will offer superior towing and labor coverage at a lower price than your insurance provider. Plus, it comes with a bevy of random benefits, like 10% off Dell products. If your folks already have AAA, you might be able to add your car to their policy for a small fee.
Uninsured and underinsured motorist protection (UM/UIM)
As the name implies, uninsured and underinsured motorist protection helps cover your costs if you’re hit by another motorist who lacks adequate insurance coverage.
Like liability, UM/UIM is broken into two categories – Uninsured motorist bodily injury (UMBI) to cover your healthcare bills and Uninsured motorist property damage (UMPD) to cover your repair bills.
Roughly half of the states require UM/UIM protection, and when you get quotes online your provider will automatically default in your state minimums. If you lease or finance your vehicle, your lender will also require UM/UIM.
But are your state or lender’s minimums enough? And what if you own your car in a state that doesn’t require it; is it worth it?
UM/UIM is pretty cheap, like under $5 a month. And considering that they can help offset your hospital bills, I recommend purchasing them, even if you don’t have to.
A common state minimum for UM/UIM is 25 | 50 | 25, meaning $25,000 UMBI per person, $50,000 UMBI per accident, and $25,000 UMPD per accident.
However, you may want to increase your UM/UIM coverage to 50 | 100 | 50 or more if:
- You drive a vehicle with poor crash-test safety ratings like an American muscle car.
- You have a pre-existing condition that would exacerbate hospital bills.
- You drive in an area with a lot of drunk drivers.
- Your UMPD coverage plus your collision coverage won’t add up to the value of your car.
Medical payments coverage
If you cause an accident, your bodily injury liability (BIL) coverage will help cover the medical bills of everyone in the other car. Medical payments coverage aka “med pay” covers you and your passengers’ medical bills.
Most providers will require you and your passengers to file a claim with your own health insurance first, but they could still sue you to recoup their high deductibles. That’s why some people call med pay “health insurance deductible… insurance.”
So how much med pay do you need?
Pennsylvania, Maine, and New Hampshire require med pay coverage. Oregon, Minnesota, New York, and North Dakota don’t even offer it. Outside of those states, you might consider a med pay limit to help offset your health insurance deductible, like $3,000.
As a rideshare driver with frequent passengers, however, you might consider ponying up for a higher limit to protect yourself from getting sued. Consider a higher limit of $10,000+.
Personal injury protection (PIP)
PIP is like med pay but it also covers lost wages. The reason both exist is that PIP was designed to help insurance companies in “no-fault states” where drivers aren’t allowed to sue each other’s insurance companies into oblivion.
Basically, those states said “look, if you get hit, everyone just file a PIP claim to your own insurance company. It’s not 100% fair, we know, but it keeps courtrooms clear.”
PIP is required in Delaware, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Oregon, Pennsylvania, and Utah, and it’s optional in Arkansas, Maryland, and Texas.
I recommend you purchase at least enough PIP coverage to meet your health insurance deductible plus one month of lost wages. In general, $10,000 PIP is a safe minimum, and since the price difference between a $500 and $1,000 deductible is usually around $3 per month, it’s probably worth the lower deductible.
Gap insurance
If you total a car that you lease or finance, there’s a chance that the amount that your insurance pays out (its actual cash value or ACV) will be less than the amount you still owe.
Having a gap between your ACV and your principal is no bueno. I mean, Imagine still owing $5,000 on a car that’s sitting crumpled in a junkyard!
Gap insurance, therefore, covers that gap (although GAP technically stands for “guaranteed asset protection”).
If you leased or financed your car through a dealer, they probably already worked gap insurance into your payments. Call them to confirm.
In the rare case that your dealer or lender doesn’t require gap insurance, you probably still want it. Gap insurance can be as cheap as $20 per year, although you typically have to bundle it with collision and comprehensive.
Rental reimbursement insurance
Sweet! Another type of car insurance that’s entirely explained in the name!
Rental reimbursement insurance covers the cost of a rental car while yours is in the shop. Here’s the litmus test to determine whether it’s worth it:
- Could you go for two weeks without your car?
- Could you bum rides, borrow a car, or drive your second car?
- Can you still make money and live life easily without your car?
If you answered no to all three, rental reimbursement insurance is probably worth it.
Usage-based insurance
Finally, there’s usage-based insurance, aka UBI aka pay-per-mile insurance. It’s less of a “type” of insurance and more of an alternative payment plan.
Under UBI you pay a flat rate per month ($30 – $50) plus a few cents per mile you drive. The structure of drive less, pay less, is designed to attract folks who drive fewer than 10k miles per year.
If the pandemic has you homebound and you can’t imagine driving more than 5,000 miles next year, UBI might be the right choice.
Classic car insurance
Classic car insurance only applies to cars that are:
- At least 25 years old.
- Have a higher market value than their actual cash value.
You might want to apply for classic car insurance if you, for example, drive an old muscle car with lots of valuable mods and parts you’d like to protect, or an old exotic car that’s worth tens of thousands more than insurance companies think.
If your car is not “classic” and is just old, definitely skip this type of insurance. It’s better to have your insurance company think your car is worth less so your premiums for comprehensive and collision stay low.
Summary
If you’re concerned that you can’t afford the coverage that you need, rather than go underinsured, find clever ways to pay less for more coverage.
Finding the “goldilocks” amount of car insurance coverage isn’t just about saving cash; it’s about peace of mind. Since the pandemic began, roads have become emptier but twice as dangerous.
So I strongly encourage you to get the right coverage from the right place, shop around every six months, and drive safely, my friends.
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