How much car insurance do I need?

Woman sitting in her car, leaning out of the passenger side window on a sunny day, smilingImage: Woman sitting in her car, leaning out of the passenger side window on a sunny day, smiling

In a Nutshell

Car insurance can help protect your finances if you’re in an accident or your vehicle gets damaged or stolen. But determining which types of insurance you need and how much can be tough. Considering factors such as where you live, what assets you have and whether you lease or finance your car can help prevent you from being under- or over-insured.
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Failing to buy enough car insurance coverage can put you at financial risk, while paying for insurance you don’t need — or too much coverage — could put unnecessary strain on your wallet.

Most states have minimum requirements for the types and amounts of auto insurance coverage you need. But beyond your state’s minimum, how do you know how much car insurance to get?

Here are three factors to consider as you shop for auto insurance.

  1. Your state’s car insurance coverage requirements
  2. Your assets and other insurance coverage
  3. Whether you finance or lease your car

1. Your state’s car insurance coverage requirements

Depending on where you live, some types of car insurance may be optional or required.

Liability coverage

Liability coverage includes two parts: Bodily injury liability coverage and property damage liability coverage. In all states but New Hampshire, drivers are required to carry a minimum amount of liability coverage.

Uninsured/underinsured motorist coverage

Uninsured or underinsured motorist coverage is a type of liability insurance that may help cover medical and vehicle repair costs if you’re hit by a driver who either doesn’t have insurance or doesn’t have enough insurance. This type of insurance is mandatory in some states and optional in others.

Medical payments coverage

Medical payments coverage can help pay for medical costs if you or your passengers are injured in a car accident. This type of coverage is required in some states and optional in others.

Personal injury protection

If you live in a no-fault state, you’re likely required to carry personal injury protection, or PIP, which is similar to medical payments coverage. Similar to medical payments coverage, PIP can help cover your medical expenses after an accident.

2. Your assets and other insurance coverage

When shopping for insurance coverage, you’ll need to choose coverage limits — the maximum amount your auto insurance company will pay on a covered claim — for any of the types of insurance listed above.

Your state has required minimum coverage limits for each type of required coverage. But choosing a limit above the state minimum could help protect your finances and assets if you were on the hook for significant medical expenses or car repair costs. When trying to determine the right coverage limits for you, here are some considerations.

Your assets

When it comes to liability insurance, consider the value of your assets, including your home, savings and investments. These assets could all be at risk if you choose your state’s minimum coverage limits and cause a major accident or are sued after a crash. If the costs were more than your liability limits, and you don’t have cash on hand to foot the bill, you might have to tap into your assets.

Your other insurance coverage

When deciding on a PIP or medical payments coverage limit, consider your health insurance and any disability insurance you might have. You may find that the coverage provided by these policies makes your state’s minimum requirement enough to protect your finances.

Remember that the higher your coverage limit, the higher your insurance premium for your car will likely be. Be sure to weigh your premium cost against the amount of money you could afford to pay out of pocket if you got into an accident.

3. Whether you finance or lease your car

If you lease or finance your car, you may be required to carry additional types of insurance, such as collision and comprehensive coverage. For both of these policies, the coverage limit is typically the actual cash value — or fair market value — of your vehicle.

With these types of coverage, you’ll need to choose a deductible that fits your needs. Common deductible amounts are $250, $500 and $1,000. You can choose a higher deductible to lower your premium — but remember that you’ll have to pay your deductible out of pocket before your auto insurance kicks in.

If you lease your car, the leasing company may also require you to carry gap insurance. Gap insurance helps cover the difference between what your insurance will pay if your car is totaled — usually the current cash value of your car — and what you owe on your auto loan.

These three types of coverage are optional if you own your car outright. But if you drive a newer car or an expensive model, you might still consider buying collision and comprehensive insurance to help pay for substantial repairs or replacement of your car if it’s stolen. On the other hand, if your car is older and your deductible and premium are more than the value of your vehicle, buying comprehensive and collision coverage may not make sense. And if you’re at risk of owing more on your car loan than your vehicle is actually worth, you may still want to add gap insurance to your auto policy.

What’s next?

Before you start shopping for auto insurance, visit your state’s transportation agency or insurance commissioner’s office websites to find out what coverage is required and the minimum coverage limits.

There are other types of optional coverage you might want to consider, like rental reimbursement coverage and towing or emergency road service coverage. A car insurance agent can help you figure out which, and how much, of these coverages make sense for you.

Once you’ve decided on the coverage you need, gather and compare car insurance quotes from several companies to help find a policy that meets your needs and fits your financial situation.

About the author: Sarah Sidlow is a freelance writer and editor based near Detroit. She has a master’s degree in journalism from Georgetown University. Sarah’s work has appeared in Luxembourg’s national newspaper, Washington City Paper… Read more.