We spend a lot of time talking about health insurance and life insurance, but now let’s talk about car insurance.
Who’s going to pay for repairs on that SUV when your teenager accidentally drives it through the garage door? Or what if your uncle forgets to put your car in park and it rolls into the neighbor’s brand-new convertible? Would you be covered, or would you have an angry neighbor and a financial mess on your hands?
When thinking about the types of insurance you need, car insurance should be at the top of your list—no matter what kind of car you drive.
But what if you’ve been wondering, How much car insurance do I need? Don’t stress―we’ll explain everything in simple language and walk you through which auto insurance coverage options are right for you.
But first, let’s cover some fundamental insurance terms.
The Lowdown: Car Insurance Terms Explained
The deductible is the portion of the damages you’ll have to pay before your coverage kicks in. Let’s say you have a fender bender and the repairs cost $2,500. If your deductible is $500, all you have to pay toward that repair is $500. Insurance would cover the remaining $2,000.
Let an independent auto insurance agent find you the best deal. We get you quotes from all the providers. Get the right coverage at the right price!
Auto insurance deductibles typically apply per claim. So, if you have another fender bender two months later, you’ll have to pay your deductible again. But in most cases, $500 is a steal compared to what could potentially have to come out of your pocket!
On the other hand, if you have a $1,000 deductible and only need $750 worth of repairs, you’re responsible for the entire $750 because it’s less than your deductible.
You’ll likely have two different deductibles under your auto insurance policy—one for collision and one for comprehensive coverage. (We’ll talk more about coverage later.)
In 2019, the average collision claim filed was $3,750 while the average comprehensive claim was $1,780.1
Car Insurance Premium
A car insurance premium is simply the dollar amount you pay for your coverage. Depending on your insurance company, you may pay monthly, quarterly, semiannually or even annually. Car insurance premiums can vary based on things like your deductible, your age, the make and age of your car, your driving history, and the type of insurance you purchase.
Your coverage limit is the maximum amount your policy will pay for each type of coverage you have. Work with your insurance agent to make sure you have the maximum amount of coverage. If you go over your policy’s limits, you’ll be responsible for any remaining costs.
No-Fault and At-Fault
Currently, there are 12 states with no-fault insurance laws.2 With no-fault insurance, your car insurance company will pay your medical bills (up to a certain limit) if you’re hurt in an accident, regardless of whether you’re at fault. The other 38 states are at-fault states—which means that when someone is labeled as “at fault” for the accident, their insurance has to pay the damages for everyone involved.3
Types of Auto Insurance Coverage and How to Choose
Essentially, there are three types of car insurance coverage: basic, extended and premium. Let’s look at the types of coverage available for each one.
The most important types of auto insurance you can have are liability, comprehensive and collision coverage. Think of these as the basics—or coverage you can’t afford to go without.
Though liability coverage doesn’t protect you or your car, it does protect your wallet! If you’re in an accident that’s viewed as your fault, liability insurance covers the third-party costs you’d normally be responsible for—medical or auto-repair costs that others are now dealing with because of this accident.
Even if your state doesn’t require liability insurance, we recommend making sure you have at least $500,000 worth of total coverage that includes both types of liability coverage—property damage liability and bodily injury liability. That way you’re covered for costs related to getting the other driver’s car fixed (property damage) as well as costs related to their lost wages or medical bills (bodily injury) that resulted from an accident where you were at fault.
Without liability coverage, you would be responsible for paying the other driver’s property damage and bodily injury costs out of your pocket. That could put you at serious risk financially—and potentially even cause your future paychecks to be kept from you until the damages are paid. No matter what kind of car you drive, liability auto insurance is a definite must-have.
When looking at your auto insurance coverage limits, you may see something like $250,000/$500,000/$250,000 or 250/500/250 for your liability coverage.
Here’s how that breaks down:
- $250,000 of coverage for bodily injury (per person)
- $500,000 of coverage for bodily injury (per accident)
- $250,000 of coverage for property damage (per accident)
Remember that hailstorm that left a lasting impression on the hood of your car? Or that time your car wasn’t where you parked it because someone else decided to claim it as their own? With comprehensive coverage, you’re covered! Whether it’s theft or damage from a fire, a storm, a natural disaster or even a tree branch falling on your car, comprehensive coverage will pay to replace or repair your car as long as the damage isn’t due to a collision.
Like liability insurance, comprehensive coverage is fairly inexpensive—so you’ll want to have it whether you’re driving a beater or a brand-new car. Seventy-eight percent of insured drivers get comprehensive coverage.4
Unlike liability insurance, comprehensive coverage isn’t legally required but we do recommend it to safeguard your financial assets.
Whether it’s the kids screaming in the back seat that makes you hit the brakes a second too late or the black ice that turns your sedan into a slip and slide . . . accidents happen. The good news is, no matter who’s at fault, collision coverage pays to repair or replace your car if you’re in an accident with another vehicle, object or even yourself.
In case you’re wondering, Doesn’t liability insurance cover those kinds of accidents? The answer: only if another driver is at fault and they have enough liability insurance to cover the damages. That’s why nearly 3 out of 4 drivers (74%) decide to purchase collision coverage.5
Let’s say your car is totaled in a wreck that happens to be your fault. The other driver’s liability coverage (if they even have it) won’t pay for your car repairs because they’re not liable (at fault) for the wreck—you are. Without collision coverage, you’d have to pay out of pocket to repair or replace your own car. Ouch!
If you’re planning to retire your beater to the junkyard and have enough savings to replace it, opting out of collision coverage may be an option. Our free Ramsey Car Guide can help you learn what to look for in a reliable used car!
So now that you have your basic auto insurance covered, what about an extra layer of protection? You’ll find plenty of options for extended auto insurance coverage. Sit down with an independent insurance agent to discuss the level of coverage that's right for you.
For the most part, a healthy emergency fund is a better option than paying for extended coverage you may never use.
Medical Payments Coverage (MedPay)
Whether you’re covered by health insurance or not, medical payments coverage (MedPay) covers reasonable medical expenses for you, your passengers or any family members associated with an auto accident—no matter who’s at fault.
Personal Injury Protection (PIP)
Personal injury protection (PIP) is similar to MedPay but has more extensive coverage, higher coverage limits and a higher premium. But unlike MedPay, PIP generally has a deductible.
Currently, there are 22 states where you’re either required by law to have PIP or have the option to purchase it as an add-on insurance.6 If you live in a state that requires you to carry PIP, take full advantage of the coverage if you ever need it. Here are some things PIP may cover for you:
- Medical expenses
- Funeral costs
- Physical or occupational therapy
- Substitute services like childcare or lawn care (if your accident left you unable to take care of your family or household chores)
- Partial lost wages
- Funds to hire subcontractors to complete your work (if you’re self-employed)
Though it varies from state to state, PIP usually offers immediate coverage up to the limit set by your auto insurance and would need to be used up before you have to tap into MedPay or your own health insurance policy.
Guaranteed Auto Protection (GAP)
Let’s pretend you lost all good sense and, instead of paying cash, you financed a brand-new SUV. If you totaled it a year later, your insurance company would only cover the actual market value of the SUV. So even though they’d be cutting you a pretty big check, it still wouldn’t be enough to pay off your loan. That’s because new cars can drop more than 20% in value in the first year.8 Yikes!
GAP insurance would fill the “gap” by covering the remainder of what you still owe on your loan.
Our recommended auto insurance coverage? Skip GAP insurance and save yourself a financial headache by buying a used car with cash in the first place. If you already have a car loan, make it your goal to pay it off as quickly as possible so you can drop the GAP coverage and lower your premium.
Uninsured (UM) and Underinsured (UIM) Motorist
Car insurance is pretty standard, but about 1 in 8 motorists drive around uninsured.9 Uninsured motorist coverage (UM) covers medical expenses (for you and your passengers) that result from a hit-and-run driver or a driver who’s uninsured, but it doesn’t cover damage to your vehicle.10
But what if you’re hit by a driver who has insurance, just not enough? Underinsured motorist insurance (UIM) covers you when you’re in an accident caused by a driver whose insurance coverage falls below the state’s required minimums.
Occasionally, you’ll find uninsured motorist property damage, or UMPD, packaged with UM and UIM. Though it usually has a lower deductible than collision coverage, you probably don’t need both UMPD and collision coverage since they essentially do the same thing.
New Hampshire is the only state that doesn’t have mandatory car insurance laws. But drivers there still have to pay for injuries or property damage if they caused an accident.11
Though it comes with all the bells and whistles, premium auto insurance coverage may also come at a premium cost. Here are some of the most common types of optional premium auto insurance coverage and how they may or may not be a good fit for you.
If you’re on a first-name basis with your mechanic, you may be tempted to sign up for mechanical breakdown insurance because it allows you to choose where your car is repaired, as long as the mechanic is licensed. Our advice? Save your money and skip this coverage. If you still want to use your favorite mechanic, use your emergency fund to pay for emergency repairs—that’s what it’s there for!
So, how exactly do you make do without a car after an accident? Who’s going to pick up the kids from school or take you to work the next day? That’s where rental reimbursement coverage was designed to come in. It covers the cost of a rental car (up to a specific dollar amount and number of days) while your car is being repaired for any damages covered by your insurance.
If your car tends to sit in the garage collecting dust, you may be interested in pay-per-mile coverage. With this coverage, a GPS device is installed in your car so you’re billed per mile, rather than an annual estimate.
Remember that time you coasted down the interstate on empty, praying you’d make it to the closest gas station? Or that time you hit a pothole and were left with two flat tires? Roadside assistance coverage comes to save you in these moments. It covers having fuel brought to you, getting your battery jumped, having your car towed to the nearest repair shop, or replacing a dead battery.
You may be wondering, Why would I purchase an umbrella liability policy if I already have liability insurance? Umbrella insurance (or personal liability insurance) is an extra layer of liability coverage that kicks in after you’ve met the limits of your current policy. Coverage is typically available from $1 million to $5 million. In addition to protecting your assets and paying for any damages you’re legally responsible for in the event of an accident, umbrella insurance normally offers a wider form of protection than liability insurance for things like legal fees, false arrests and even slander. If your net worth is $500,000 or higher, umbrella insurance is a must to protect your assets!
If you’ve permanently installed aftermarket parts (not made by the original manufacturer) or performance parts on your car, you could carry custom equipment coverage to help repair or replace enhancements like custom running boards, stereo systems or even a custom paint job.
To save money, insurance companies often use aftermarket parts when they replace or repair parts on your vehicle. Original Equipment Manufacturer (OEM) endorsement coverage ensures that the same parts your manufacturer safety tested and used to originally build your vehicle will be used on your car.
Forgiveness Coverage (Accident Forgiveness or Minor Violation Forgiveness)
Did you know that just one at-fault accident can cause your insurance premiums to increase by as much as $569!12 Though forgiveness coverage may not be able to turn back time and undo an accident, it can essentially wipe your slate clean by “forgiving” your first at-fault accident. Depending on your insurance company, this coverage may only apply once per policy term, or it may take years of safe driving to go into effect.
If you live next to a golf course, you may have found yourself wishing you had glass coverage to pay for the cost of fixing or replacing the windows on your car. Some insurance companies offer glass coverage with no deductible, but the cost of the added coverage may outweigh the benefits, especially with some policies only covering the windshield.
Should I Choose a High or a Low Deductible—Which One Is Right for Me?
Now that you’re an expert on basic, extended and premium car insurance, it’s time to determine if you can afford yours.
If you choose a high deductible, your insurance company looks at you as a lower risk and will reward you with a lower premium. If you choose a low deductible, your insurance company looks at you as a higher risk and will—you guessed it—give you a higher premium.
A $1,000 deductible usually means you’ll pay a lower premium. And since the first Baby Step is to save up a $1,000 starter emergency fund, you’ll have the savings on hand to cover your deductible. But before you sign up for a $1,000 deductible, work with your insurance agent to make sure it’s worth the extra risk by running a break-even analysis as you compare rates.
For example, if you raise your deductible from $500 to $1,000, you increase your risk by $500. If that reduces your annual premium by $50, you’ll have to go 10 years without an accident to break even—not a great deal. But if increasing your deductible knocks $150 off your annual premium, you’ll break even in just over three years. That makes much more sense!
Whatever you end up doing, there are lots of ways to save on car insurance.
A higher deductible reduces your premium because you pay more out of pocket if you have a claim. Hiking your deductible from $500 to $1,000 can cut your premium by around 11%.13
What About a Disappearing Deductible?
No, it’s not a magic trick, and your payments definitely won’t vanish into thin air. Some insurance companies offer disappearing deductibles at an additional cost for drivers with a long history of safe driving. The deductible decreases every year you’re accident-free. For example, if you have a $500 deductible and have been accident-free for five years, your deductible would drop to $0. What’s important to remember is that the deductible reappears in full the second you get into an accident. Ta-da!
Here’s some solid advice from one of our Endorsed Local Providers Brandon Smith: “A good rule of thumb is to insure for what could financially devastate you, rather than what inconveniences you.” So, a disappearing deductible may not be the reward it claims to be. Factoring in the extra cost of the coverage, you’re better off saving that money to put toward your debt snowball or emergency fund.
“A good rule of thumb is to insure for what could financially devastate you, rather than what inconveniences you.” — Brandon S., Insurance ELP
Should I File a Claim?
If your car needs $250 worth of work thanks to a fender bender, should you file a claim? Isn’t that what you have car insurance for? Yes . . . and no. Frequent small claims are red flags that could cause your premium to go up. Plus, if you have a $1,000 deductible on a repair that costs $250, it doesn’t make sense to file the claim because you’ll be footing the bill anyway. Your emergency fund is there for a reason! Pick your battles carefully and file a claim only when it makes sense.
Make Sure Your Insurance Agent Knows
All kinds of factors affect the type of insurance you need and the premium you’ll pay. Below is a list of key information your insurance agent needs to know to not only pick the right policies for you but to also save you some hard-earned money in the long run!
- If you’re married
- If you use your car for both business and personal use, even if it’s a small side business
- If you plan to travel out of state frequently
- If you have a teen driver who makes good grades or has completed driver’s education
- Who you want included on your policy
- If you have a college degree
- If you lease your car or still owe money on it
- If you own a home
- Your occupation and the occupations of others on your policy, or if you are or have been in the military
- If you park your car in a garage
- If you have any anti-theft devices installed in your car
- If you’d prefer to get paperless statements
- If you want any household members excluded from your policy
With so many variables surrounding the types of car insurance available, it’s easy to spend more money than your coverage is worth. So, if you’re still wondering, How much car insurance do I need, get with an expert who can answer your questions, run the numbers, and help you get the best deal.
Our Endorsed Local Providers (ELPs) are independent professionals who work with several insurance companies to help you find the right coverage at the right price. Make sure you and your family have the coverage you need to protect you and your car. Find your ELP today!