How Much Car Insurance Do I Need?

If you’re asking “How much car insurance do I need?” but really thinking What’s the cheapest car insurance I can get? you’re looking at it the wrong way. You’re one bad accident away from financial disaster if you have a policy that doesn’t actually cover you. If you think about it for a minute, we bet you already know this deep down inside. Going with state minimums is a trap. You need the right amount of coverage so you can drive with confidence that no accident is going to wipe out your finances.

We’ll look at the coverage amount you need, the types of coverage that matter, and how to decide what’s right based on where you’re at in life.

 

Why Do You Need Car Insurance?

So, do you have to have car insurance? Yep! Driving around without car insurance is dangerous, stupid and—if that wasn’t enough—illegal. If you own a car and drive it, almost all states require you to have certain minimum coverage. You also need car insurance to protect your finances. Before you run out and get an auto policy, let’s make sure you’re confident in what kinds of coverage you need.

What Kinds of Car Insurance Do You Need?

Most drivers need three types of car insurance: liability, comprehensive and collision. These are known as the big three in car insurance, and together they make up full coverage. There are others worth considering too, like uninsured motorist (UM) and underinsured motorist (UIM) coverage, medical payments (MedPay) coverage, and personal injury protection (PIP). 

Let’s nail down a few basic car insurance terms before we dig in.

Car Insurance Terms to Know
Deductible	What you have to pay before your insurance company will pay their share
Premium	What you pay for your coverage (usually monthly)
Coverage limit	The maximum amount your policy will pay for each type of coverage (if costs exceed your policy’s limits, you’re responsible for the rest)

Liability Coverage

Liability car insurance pays for injuries and property damage you cause to others in an accident that’s your fault. It typically includes bodily injury liability and property damage liability and helps cover medical bills, repairs and legal costs. It does not pay for your own injuries or vehicle damage.

We recommend carrying at least $500,000 in liability coverage. (Sending the folks you hit a sympathy note is a nice touch too—just sayin’.)

Every U.S. state requires you to have liability coverage except for New Hampshire and parts of Alaska. So car insurance isn’t optional. You’re required to carry at least your state’s minimum liability coverage just to drive legally almost anywhere.

On the other hand, those state minimums aren’t nearly enough to protect you. Like we said earlier, you should have at least $500,000 in liability coverage. It’s often split between bodily injury per person, total bodily injury per accident, and property damage.

If you’ve never taken a close look at your insurance paperwork, you’ll want to take a minute to find out if your coverage limits are written as split coverage or single coverage. Most are split coverage, but let’s look closer at both types and see how each one works with your goal of $500,000 in coverage.

Split Coverage Limits

Split coverage limits refer to liability coverage written as three separate dollar amounts for bodily injury per person, bodily injury per accident, and property damage per accident. It looks like this: 250/500/250—but the numbers can vary. These limits define the maximum an insurer will pay for each category of loss when an accident is your fault.

Most policies have split coverage limits. But don’t let all the digits confuse you. We’ll break down what each one means.

The first number is the bodily injury per person limit. (Yeah, these docs get a little morbid.) This number should be at least $250,000 in coverage. If you’re at fault in an accident, the policy in our 250/500/250 example will cover up to $250,000 in medical, legal, funeral or lost wage costs for one person in the other vehicle—the driver or a passenger.

Of course, it’s possible for multiple injuries to happen in an auto accident. And now you’re looking at some big bills! That’s where the second number comes in. It’s the bodily injury per accident limit. In our example, the policy will pay up to $500,000 to help cover those costs for multiple people, and you’d be responsible for the rest out of pocket.

The third number is the property damage per accident limit. It’s the amount your insurer will pay to replace or repair the other vehicle or property you damaged. So, this policy would pay for up to $250,000 in property damage.

This 250/500/250 policy provides up to $250,000 in bodily injury coverage per person, $500,000 in bodily injury coverage per accident, and $250,000 in property damage coverage per accident. While you’ll often hear 100/300/100 coverage recommended, that’s just not enough. You might think that sounds like plenty, but accident costs can add up quickly! That's why we recommend carrying at least 250/500/250 liability coverage.

In case you were wondering, leftover money from one category of coverage doesn’t work like the leftover meatloaf you saved from last night’s dinner for today’s lunch. In other words, it can’t be used to cover costs in another category. The costs are defined, and the limits are, well, limited.

But there is another, more flexible way to set up your policy.

Single Coverage Limit

A single coverage limit (aka a combined coverage limit) is an alternative to split liability coverage. Instead of defining three types of liability coverage and giving them separate limits, a single coverage policy just has one dollar amount to cover any liability costs for an accident—property damage or injuries. Convenient, right?

This type of limit is a lot more flexible, so we recommend asking your insurance agent to help you get this kind. Again, it’s worth it to get a cool half-million in coverage.

Whichever type of coverage limit you choose, here’s the bottom line: You need to at least hit that $500,000 mark. That way, if an accident is your fault, you’ve got a good amount of coverage for property damage (like repairing the other driver’s car or a smashed fence) as well as bodily injury costs (like medical bills and lost wages).

Without liability insurance, you’d have to pay for these things out of pocket. Yeah, let’s try to avoid that.

Comprehensive Coverage

Comprehensive coverage pays for damage to your car caused by events other than a collision. This includes things like theft or damage from a fire, a storm, a natural disaster, an animal, vandalism or falling objects—so if a tornado ever throws a flaming beaver through your windshield, you’re triple covered. It helps pay to replace or repair your car after those kinds of events.

Although comprehensive coverage isn’t legally required unless you have a loan or lease (and why would you have those?), you should still have it to protect your finances from life’s flukes. Like a piano falling on your car.

A good way to save money is by setting your deductible at $1,000 or more. This will lower your premiums because you’ll cover smaller expenses out of pocket.

Collision Coverage

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. It typically covers damage to your vehicle after you’ve met your deductible.

You can think of collision coverage as the flip side of liability, which pays for other people’s vehicles or medical bills. And just like comprehensive, collision isn’t legally required (again, unless you’re leasing or have a loan).

So, do you need collision? Here’s what we’ll say: If you can’t replace your car with cash, you should get collision coverage. Because without it, you’ll be on the hook to replace your car if it’s totaled—and the last thing you need at that point is a new monthly car payment. (And to repeat some deductible advice from above: Go for that $1,000 mark—it’ll save you money on premiums.) The only time you might not need collision insurance is if your car is paid off and you could replace it with cash from your savings.

Uninsured Motorist (UM) and Underinsured Motorist (UIM) Coverage

Uninsured motorist coverage (UM) pays for your injuries and, in some cases, property damage if you’re hit by a driver with no insurance. Underinsured motorist coverage (UIM) applies when the at-fault driver’s insurance isn’t enough by helping cover remaining medical expenses, lost wages and related damages up to your policy limits.

Some states require you to have uninsured motorist coverage. But whether your state requires it or not, it’s worth it because 1 in 7 drivers on the road have no insurance.^[3] It’s a pretty affordable add-on, and hit-and-runs are real. You do not want to be left holding the bill for a mess like that.

Occasionally, you’ll find uninsured motorist property damage (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. But if you drop one of these insurance types, be sure you already have the other one in place.

 

Medical Payments Coverage (MedPay)

Whether you’re covered by health insurance or not, medical payments coverage (MedPay) pays reasonable medical expenses for you, your passengers or any family members involved in a car wreck—no matter who’s at fault. Depending on where you live, MedPay might be required.

Your health insurance should be enough to cover those costs, so you don’t necessarily need to get MedPay coverage. On the other hand, adding it costs very little, especially if you’re bundling policies with the same company. The extra layer could come in handy! To find out if you’re good to go already or need to add MedPay, be sure to review your coverage with a RamseyTrusted pro.

Personal Injury Protection (PIP)

Personal injury protection (PIP) is a type of car insurance that covers medical expenses, lost wages and certain related costs for you and your passengers after an accident, regardless of fault. It may also include benefits like rehabilitation services, replacement services and funeral expenses, depending on state requirements. PIP is similar to MedPay but has more extensive coverage, higher coverage limits and a higher premium. Unlike MedPay, PIP generally has a deductible.

So far, 19 states either require PIP or give drivers the option to add it to their policy.² 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 kids or grass)
• Partial lost wages
• Funds to hire subcontractors to complete your work (if you’re self-employed)

Though it varies from state to state, PIP coverage usually kicks in right away and provides coverage up to the limit you choose. It also has to be used up before you can tap into your MedPay or health insurance policy.

So, you’re probably wondering, Do you recommend PIP? Personal injury protection is helpful in many situations, but not all. Obviously, if you live in a state where it’s required, you’re going to need it. No matter where you live, PIP covers so many things at a great value. Here are a few things to keep in mind:

• Anyone who doesn’t have health insurance (a very bad idea, by the way) or has sucky health insurance coverage would be wise to get PIP.
• You might decide to skip PIP if you have really good health insurance that provides thorough post-accident coverage. But another idea would be to go with the bare minimum of PIP to be super safe and save on premiums.
• No matter what your situation, asking a trusted insurance pro if you need PIP is smart.

(Sidenote: Gladys Knight and the Pips make for super smooth driving music.)

 

Insurance Can Be Confusing. We Have Someone Who Can Help.

RamseyTrusted^® insurance pros are independent and vetted—and they help you fill the gaps in your policies. They make getting insurance (like home, auto and umbrella) one less thing to stress about. Plug in your zip code to connect with an agent who understands the coverage needs in your area.

 

 

How Much Liability Coverage Do You Need Based on Your Net Worth?

You should have enough liability car insurance to cover your net worth. In other words, your liability coverage should be equal to or greater than the total value of your assets and savings.

That’s because liability insurance is what protects you from lawsuits. People usually sue you based on how much you’re worth. So if you’re worth a lot, they’ll sue you for a lot—no matter how much the apparent damage and medical costs added up to. Let’s look at an example to see if 50/100/50 is enough car insurance. (Spoiler alert: It’s not.)

Say you have a 50/100/50 policy (a common state minimum for liability coverage). You cause an accident and the other driver notices you hit them with a Lexus. They decide to sue you for pain and suffering on top of medical expenses for a total of $700,000. You’ll be on the hook for $650,000 if they win. If your net worth is around $700,000, you’re toast.

That’s why if you’re worth over $500,000, we recommend adding an umbrella policy on top of your $500,000 auto liability limit.

Common State Minimum	Common Recommendation	Ramsey Recommendation
		Normal	High Net Worth
50/100/50	100/300/100	250/500/250	250/500/250 + umbrella

 

 

Should You Choose a High or Low Deductible?

Whether you should choose a high or low deductible depends on how much money you have saved to handle sudden expenses. If you have at least $1,000 in an emergency fund, you should choose a high deductible and save on premiums. If you’re currently strapped for cash, a low deductible might be a better option for you.

Let’s break that down.

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—charge you a higher premium. (If your emergency fund can handle it, we recommend the first option.)

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.

Break-Even Analysis Formula Deductible increase ÷ Annual premium savings = Years to break even

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. Some insurance companies offer disappearing deductibles for drivers with a long history of safe driving. The deductible decreases every year you’re accident-free. But they hike the premiums up for this perk, which makes the savings on the other end not worth it. Plus, the deductible comes right back if you ever get in an accident.

 

What Optional Car Insurance Coverages Are Worth It?

There are a lot of optional car insurance coverages you could get, but whether they’re worth it depends on the coverage and your situation.

Coverage Type	What It Covers	Ramsey’s Opinion
Guaranteed asset protection (GAP)	Covers the gap between your loan balance and your car’s value after a total loss	Not worth it
Mechanical breakdown	Covers car repairs	Not worth it
Rental reimbursement	Pays for a rental car while your car is repaired	Depends on your situation
Pay-per-mile coverage	Collision, comprehensive and liability	Depends on your situation
Roadside assistance	Covers towing, battery service, lockouts and fuel delivery	Worth it
Umbrella insurance	Covers liability above your auto policy limit	Depends on your situation
Custom equipment coverage	Covers repairs or replacement of custom modifications	Depends on your situation
Accident forgiveness	Covers your first at-fault accident without raising your rates	Depends on your situation
Glass coverage	Pays to repair windshields and sometimes windows	Not worth it
Classic car insurance	Covers cars considered classic	Worth it
Rideshare insurance	Covers the difference between a rideshare company’s coverage and actual costs	Worth it

Guaranteed Asset Protection (GAP)

GAP insurance covers the gap between your loan and the car’s value after a total loss—but no one should be taking out loans to buy a car, so you shouldn’t need it!

That said, let’s pretend you lost your mind and financed a brand-new SUV instead of paying cash. (Seriously, don’t do this.) If you totaled it two years later, your insurance company would only cover the actual cash 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 about 17.5% of their value in the first two years.^[4] Yikes!

GAP insurance fills this “gap” by covering the remainder of what you still owe on your loan.

If you want to save yourself a financial headache, skip GAP insurance and buy 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. Then you can drop the GAP coverage (which lenders often require) and lower your premium.

Mechanical Breakdown

You might be tempted to sign up for mechanical breakdown insurance because no one likes the thought of having to pay for repairs. But our advice is to save your money and avoid this coverage. Use your emergency fund to pay for emergency repairs—that’s what it’s there for!

Rental Reimbursement

Rental reimbursement covers the cost of a rental car (up to a specific dollar amount and number of days) while your car is in the shop. Our advice on this one is that it really comes down to the price and whether you think you’ll need this kind of backup plan. 

If adding this is going to spike your premium a lot, give it a pass. Your emergency fund should be able to cover a temporary rental (and save you money in the long run).

Pay-per-Mile Coverage

If your car tends to sit in the garage collecting dust, you may need to get out more. But you may also be interested in pay-per-mile coverage. With this coverage, your insurer installs a GPS device in your car so you’re billed based on the miles you actually drive instead of an estimate of your annual mileage. This is a good way to go if it will save you money—you just have to do the math.

Roadside Assistance

Roadside assistance coverage saves you from bad times like praying you’ll make it to the closest gas station or hitting a pothole and earning two flat tires. We say it’s worth it for the peace of mind if it’s not too expensive.

It covers things like having fuel brought to you, getting a battery jump-start, having your car towed to the nearest repair shop, or replacing a dead battery. And if you don’t have a roadside assistance plan like AAA, it can really come in handy.

Umbrella 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 car insurance policy. You’ll typically find coverage ranging from $1 million–5 million. If your net worth is $500,000 or higher, umbrella insurance is a must to protect your assets!

It also covers any damages you’re legally responsible for in the event of an accident. Plus, umbrella insurance normally offers a wider form of protection than liability insurance for things like legal fees, false arrests and even slander.

Custom Equipment Coverage

If tricking out your ride is the way you roll, then custom equipment coverage is something you should look into. It will cover all those upgrades like roll bars, fog lights, performance enhancements and even custom paint jobs.  

Accident Forgiveness (Forgiveness Coverage or Minor Violation Forgiveness)

Accident forgiveness means the insurance company won’t raise your premiums after your first at-fault accident. You usually have to pay for this coverage (although sometimes it’s offered for free) and have an excellent driving record. If it’s free, we say go for it—but pass if it hikes up your premiums much on the front end.

Glass Coverage

Glass coverage will pay to replace broken glass on your car. Some insurance companies offer glass coverage with no deductible, but the cost of the added coverage probably outweighs the benefits, especially since some policies only cover the windshield.

Classic Car Insurance

Restoring classic cars is a cool hobby—but it’s also expensive! That goes for repairing or replacing them too. If you’re into older cars, you’ll want to consider classic car insurance. This will protect your investment if that sweet 1967 Volkswagen Beetle gets damaged or stolen.

Rideshare Insurance

Driving for a rideshare company like Uber or Lyft is a great way to make some extra cash. But most people doing this kind of work have no idea that their personal policy won’t cover a rideshare hustle. And the rideshare companies don’t offer full coverage. That’s where rideshare insurance can make up the difference.

 

How Much Is Car Insurance?

Insurance costs vary a lot individually, but the national average cost of car insurance is $1,993 per household.^[5] (As a monthly premium, that works out to about $166.) Keep in mind, that’s an average—and it’s measured per household, which includes roughly 2.5 people.^[6]

 

How Do You Get the Right Car Insurance Coverage?

Anyone can jump online and get some kind of car insurance with a few clicks and maybe a phone call. But how do you get the right coverage? And how do you make sure you’re not overpaying?

Your biggest asset is an independent insurance agent. These experts will help you figure out what you need and pick the right policy to protect you well. They’re also great at shopping around and finding you the best price.

We’ve vetted a whole list of car insurance pros who won’t just look at how to get the cheapest car insurance—they’ll help you find the right coverage at the right price. RamseyTrusted pros have the heart of a teacher and are all about making sure you get the policy that will serve you best. They’ll walk you through everything so you can get back to cruising around in your ragtop, slinging dirt down a country road, or chauffeuring the kids to soccer—whatever toots your horn.