When it comes to car insurance, the age-old question is, How much car insurance do I need? Should you just get the cheapest option?
We’re gonna shoot straight with you: Saving money isn’t the only part of buying car insurance. You need coverage that actually covers you, the kind that protects you from budget-busting car wrecks.
You can fail that driver’s test 11 times before you get your license, but there are not a lot of second chances when it comes to car insurance. You’re either covered or you’re not.
One of the big reasons it’s hard to get the right coverage is because, let’s face it, car insurance is confusing. That’s why we’re going to show you exactly what you need. For starters, most drivers should have at least three types of car insurance: liability, comprehensive and collision.
But before we dig into exactly how much car insurance you need, let’s understand some insurance terms.
Why You Need Car Insurance
Driving around without car insurance is not only dumb with a capital D, it’s also illegal. Yet one in eight Americans drives without some kind of auto insurance in place.1 Don’t do this. There are serious consequences if you’re caught on the road without car insurance. If you’re one of those rule-breaking types, this isn’t a rule you want to mess with. (But you can drive barefoot if that’s your thing!)
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Another reason to get car insurance is because it protects your finances and assets. How else are you going to cover the costs after your teenager accidentally drives your SUV through the garage door? (Oops!) Or when your uncle forgets to put your car in park and it rolls into your neighbor’s brand-new convertible? (Crunch.)
The right amount of car insurance can really save your financial skin. And in the grand scheme of things, it’s not that expensive. (More on the average costs later.)
What Kinds of Car Insurance Do I Need?
First, let’s break down a few basic car insurance terms. The deductible is what you have to pay before your insurance company will pay their share. A premium is what you pay for your coverage (usually monthly). Your coverage limit is the maximum amount your policy will pay for each type of coverage. If you go over your policy’s limits, you’re responsible for any remaining costs.
Now, there are a bunch of different types of car insurance. The most important ones are liability, comprehensive and collision coverage. We’ll call them the Big Three. Think of them as the basics—coverage you can’t afford to go without. If you have all three, it means you have full coverage.
Liability insurance covers costs like medical or repair costs for other people if you cause an accident.
Every U.S. state requires you to have liability except for New Hampshire and parts of Alaska. So if you’re wondering, How much auto insurance do I need?—liability’s not an option. You need to get your state’s minimum liability.
But those state minimums are not nearly enough to protect you. We recommend having at least $500,000 worth of total coverage that includes both types of liability coverage—property damage liability and bodily injury liability. That way, if an accident’s your fault, you’re covered for costs related to repairing the other driver’s car (property damage) and any costs related to their lost wages or medical bills (bodily injury).
Without liability, you’d have to pay for these things out of pocket. Yeah, let’s try to avoid that . . .
Comprehensive coverage protects you from things like theft or damage from a fire, a storm, a natural disaster or even a tree branch falling on your car. Comprehensive will pay to replace or repair your car as long as the damage isn’t due to a collision.
An estimated 78% of insured drivers have comprehensive coverage.2 It’s not required unless you have a loan or lease. And because accidents happen, we recommend comprehensive to protect yourself from life’s flukes.
Collision insurance covers the cost to repair or replace your car if you’re in an accident with another vehicle or object. No matter who’s at fault, collision covers your vehicle as opposed to liability, which covers other people’s vehicles or medical bills.
Nearly 3 out of 4 drivers (74%) purchase collision.3 Just like comprehensive, it’s not required (again, unless you’re leasing or have a loan).
So, do you need collision? Here’s what we say: If you can’t replace your car with cash, you should get collision. This is because, without it, you’ll be on the hook to replace your car if it’s totaled. The only time you might not need collision is if your car is paid off and, again, you could replace it from your savings.
Uninsured (UM) and Underinsured (UIM) Motorist
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.4 And keep in mind that some states require you to have uninsured motorist coverage.
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.
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. Depending on where you live, MedPay is a requirement.
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.5 If you live in a state that requires you to carry PIP, you should 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.
Optional Car Insurance Coverage
Now that we’ve looked at the main types of car insurance, let’s see what else is available.
Guaranteed Auto Protection (GAP)
Let’s pretend you lost all good sense and, instead of paying cash, you financed a brand-new SUV (seriously, don’t do this). If you totaled it a year later, your insurance company would only cover the actual market value (ACV) 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 lose more than 20% in value in the first year.7 Yikes!
GAP insurance fills this “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.
Temporary Car Insurance
Temporary car insurance is another type of coverage you should know about. It’s an option if you’re only planning to drive a car for a short period (usually six months or less). So if you’re going on an epic road trip with your siblings and plan to drive your brother’s car, temporary car insurance is helpful. However, most reputable insurance companies don’t offer it. Instead, it comes in the form of non-owner car insurance or rental car insurance.
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 comes in. It covers the cost of a rental car (up to a specific dollar amount and number of days) while your car is in the shop. If you think you’ll need this back-up plan in place, it’s not a bad idea to add this to your policy.
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 saves 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. And if you don’t have something like AAA, it can really come in handy.
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 significantly increase your insurance premium? Though forgiveness coverage may not be able to turn back time and undo an accident (that’s what time machines are for), 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.
Classic Car Insurance
If one of your hobbies is restoring or collecting classic cars, you’ll want to look into classic car insurance. This will protect your investment if that 1967 Chevy Corvette is damaged or stolen.
Driving for a rideshare company like Uber or Lyft is a great way to make some extra cash. But your personal policy won’t cover you. And the rideshare companies don’t offer full coverage. That’s where rideshare insurance can make up that difference.
Should I Choose a High or Low Deductible?
Now that you’re an expert on what kind of car insurance you might need, it’s time to dig deeper into how to pick the right deductible.
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 sees 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.
And if you’ve heard of something called a “disappearing deductible,” no, it’s not a magic trick. 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. So if your deductible is $500 and you’ve been accident-free for five years, your deductible would go to $0. But the deductible reappears in full the second you get into an accident. Ta-da! Factoring in the extra cost of the coverage, you’re usually better off saving that money to put toward your debt snowball or emergency fund.
How Much Is Car Insurance?
If your next question is, How much does car insurance cost?—we’ve got some numbers for you. The national average cost of car insurance is $1,202 for full coverage or $644 for liability.8,9 (That works out to about $100 for full coverage or $54 for liability car insurance per month.)
But that’s just the average. There’s a ton of factors that impact what you’ll pay. Here are just a few:
- Type of policy
- Policy limits and deductibles
- Type of car
- Age and gender
- Marital and family status
- Driving record
- Credit history
- How much you drive
Also, if your insurance company decides you’re high risk, you can definitely expect to pay more. But take heart. If you stay out of trouble for a little while, your premiums will eventually come back down to earth.
Another thing that could cause your premium to go up is if you’re constantly filing claims. So if you have $250 worth of work thanks to a fender bender, you might not want to file that claim. 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.
How to Get Car Insurance
Now that you know everything there is to know about car insurance, the final question is, How do I get the right car insurance coverage?Whether you’re purchasing it on your own or using an insurance agent, here are a few tips regarding how to get car insurance.
Having the following key information on hand will allow you to get the right policies and can even 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. It’s also easy to think you have enough while actually being underinsured.
Your goal is to find your car insurance sweet spot. The best way to do this is by working with an independent insurance agent who is part of our Endorsed Local Providers (ELP) program. These insurance pros are RamseyTrusted and can look at your unique situation to find you the best protection at the right price. They can answer your questions and even run the numbers for you to get you the best deal.