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Car insurance isn't one-size-fits-all. Each state has different requirements, and factors like who owns your car and your overall financial health will also come into play. Every person has different insurance needs, but you'll need to understand what's available before you decide.
There are many different types of coverage in your policy. What's required and available will vary by state. There are seven major types of insurance coverage:
Liability insurance covers affected parties' bodily injury and property damage if you're at fault in an accident. Most states require drivers to carry the minimum liability coverage to drive.
Collision insurance covers you if you hit another car or an object, this coverage repairs or replaces the car. It's often required by financing and leasing companies.
While not often required by state law, this coverage helps repair or replace a car damaged by an outside force, like a storm, theft, or vandalism. Like collision coverage, your auto loan lender may require you to carry comprehensive insurance.
UM and UIM coverage is insurance required in some states. This coverage will help if you're hit by an uninsured driver, or cover damages if their coverage isn't sufficient.
Drivers in no-fault states must carry first-party medical benefits (PIP). PIP covers expenses related to injury after an accident, such as medical bills and lost wages, regardless of fault. Medpay is also required in some states (though often optional). This coverage can help with medical bills, health insurance co-pays, and deductibles. PIP's coverage is broader than Medpay's.
Other types of coverage, like gap insurance, rental reimbursement, travel coverage, non-owner car insurance, and towing and labor cost coverage are available options, depending on your insurer.
If you're looking for car insurance coverage and are trying to determine how much you need, consider these factors to make the right choice.
Each state sets its own rules on car insurance, including the minimum coverage you need. The requirements for meeting the state minimum vary widely across the U.S. Check your state's motor vehicle or insurance department website for requirements.
In most states, the minimum coverage is a liability policy, which only covers damage you do to another person, their car, or their property. However, some states have higher minimum coverage. In Michigan, a state minimum policy would include basic liability coverage and no-fault coverage, including personal injury protection, property protection insurance, and residual liability insurance coverage. But, a few states don't require any insurance at all — in New Hampshire, for example, there's no minimum requirement for insurance.
If you don't own your car outright, you must maintain more coverage than the state minimum. Financing and leasing companies require more than the state minimum insurance. You'll typically need five types of coverage on your financed or leased car:
Since liability coverage only covers another person's injuries and damage, financing companies require coverage to repair the car or reimburse it after an accident. You'll need to maintain this coverage to stay within the terms of your lease or finance contract. Your financing company can provide information on what coverage is needed.
If you drive a new or high-valued car, collision and comprehensive may be worth it to protect your investment after an accident. You may not need it though if you drive an old clunker and can replace it with your own savings.
If you're considering dropping some coverage to make insurance cheaper, it might be worth evaluating not just what you can afford every month, but also what you could afford if something went wrong.
Think about it in terms of optional comprehensive insurance, which covers damage due to non-collision events. If a tree fell on your car tomorrow, would you be able to cover the cost of repairing or replacing it without insurance? If the answer is no, keeping comprehensive coverage and adding a few extra dollars to your monthly car insurance bill may not sound so bad anymore.
This philosophy should extend into all parts of your coverage. If you know that you won't be able to cover a $1,000 deductible if you get into an accident, pay more for coverage each month and keep a lower deductible. The less ability you have to cover yourself financially should something go wrong, the more insurance coverage you'll need.
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You want to choose bodily injury and property damage liability limits that are higher than your net worth. This way, if you get into an at-fault accident, you don't have to lose your assets to pay liability expenses.
For example, say your net worth is $50,000. In that case, sufficient amounts could look like 100/200/100. or $100,000 in bodily injury per person/$200,000 total bodily injury per accident/$100,000 property damage per accident. (Generally, costs related to bodily injuries are more expensive, so you'll want to increase those coverages—that's why the middle number is higher).
Collision and Comprehensive Coverage pays for the cost of repairs or replacement equal to the actual cash value (ACV) of your vehicle—a.k.a. the depreciated value of your vehicle. You may also want to look into new car replacement coverage, which companies offer at an extra cost. If you total your car, this insurance replaces it up to its original purchase price, which is higher than the default ACV amount.
If you need to file a claim for compensation, you must pay a deductible. This is the amount you pay out-of-pocket before your insurance coverage pays for vehicle repairs or replacement.
If your state requires UM or UIM insurance, ensure you're not driving uninsured or underinsured to avoid financial and legal penalties. For the most protection, consider matching your liability limits, especially if you live in a state with high rates of uninsured drivers.
As mentioned, some states mandate PIP or Medpay coverage. Again, it's important to remain in compliance with your state's coverage limits.
The amount you need depends on your current health insurance policy. If you have health insurance with low limits, limited coverages, and high deductibles or co-pays, auto insurance medical coverage can fill those gaps.
Speak to a licensed insurance agent or broker for guidance on policy customization. The agent can help you understand your options, recommend coverages and limits, and find the best insurance policy for your needs.
Calculating your net worth to figure out the amount of liability coverage to buy. Remember, bodily injury or property damage liability limits should exceed your net worth. To calculate your net worth subtract the value of your assets (i.e., the value of your home, cars, savings, and investments) from your debt.
A good rule of thumb when choosing a deductible is to already have that much saved up. For instance, if you have a $1,000 deductible, you should already have at least $1,000 in emergency savings for when you need to file a claim.
Increasing your deductible will lower your rates. So if you can afford to choose a higher deductible your deductibles, it may help you lower your premiums.
Is gap insurance worth it? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Gap insurance may be worth it, but it depends on your individual circumstances. If you're upside-down on your loan, have a high-risk vehicle, or it's a requirement on your loan contract, getting gap insurance is a smart idea.
Do I need gap insurance if I have full coverage? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
You must purchase gap insurance separately or as an add-on to your insurance policy, even if you have full coverage. A full coverage policy includes comprehensive and collision coverage but doesn't automatically include gap insurance.
How long do I need gap insurance? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
You need gap insurance as long as you owe more on your car than it's worth, which is usually applicable in the early years of your policy. You can cancel it once your value exceeds your loan balance.
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