Auto insurance is a major cost of owning a car. But many Americans buy more than they need. Now here’s to finding out what you really need to pay for – and where you can save.
The average American driver now spends approx $190 a month in car insurance4% more than $182 in the past year, according to the Federal Reserve.
Common types of insurance include liability, uninsured motorist coverage, personal injury protection, as well as comprehensive and collision insurance, to cover everything from injuring another driver in an accident to storm damage to your car.
But depending on your vehicle and your financial situation, you may not need all of these types of coverage. Lowering your coverage amounts and cutting back on optional coverage types such as collision and comprehensive can lower your monthly premiums.
We’ll show you how to decide which auto insurance policy will work for you, so you can be sure you’re getting the coverage you need without breaking the bank.
Types of car insurance
Typical auto insurance includes several types of coverage, some of which are optional and others mandatory. Among which:
- Liability insurance covers injury to other people or damage to their property and is required in almost all states
- Uninsured or underinsured motorist coverage protects you in the event of an accident involving an uninsured or insufficiently insured driver and is mandatory in some states
- Protection against personal injury covers your medical bills after an accident, regardless of who’s at fault, and is mandatory in some states
- Comprehensive insurance coverage covers non-collision damage to your vehicle, such as from theft or natural disasters
- Collision insurance coverage covers collision damage to your vehicle
How much liability insurance do I need?
Liability insurance, which costs approx $60 per month for minimum coverage, has two main components: bodily injury, which you cover if you injure someone else in an accident, and property damage, which you cover if you damage their car or other property.
When you purchase liability coverage, you purchase a “per person” personal injury coverage limit, which is the limit that is covered for each individual person injured in an accident. For example, if you are in an accident involving another car with a driver and one passenger, with a coverage limit of $100,000 per person, your insurance company will pay up to $100,000 for each person injured in the accident.
You will also need to decide on a limit for “per accidental” bodily injury coverage. If you select a $300,000 per accident coverage limit, that’s the maximum your insurance company will pay, regardless of how many people are injured. Property damage coverage limits are also priced per accident.
The coverage limits of liability insurance are often expressed with a ratio. For example, New York State requires drivers to have $25,000 in personal injury liability insurance per person and $50,000 per accident, as well as $10,000 in property liability insurance, denominated at the ratio of 25/50/10. That said, you may want to have more coverage than your state-mandated minimum — a long-standing rule of thumb is coverage limits of 100/300/100.
- How much to get: Consider 100/300/100 coverage
- Consider cutting costs if: While it’s possible to lower your premium by carrying less liability coverage, most experts say there are better places to save
Most experts say the industry’s 100/300/100 rule of thumb is a good place to start. Those levels are well above the median personal injury liability claim of $22,700as you are covered up to $100,000 per person and $300,000 per accident.
If you can easily afford it, it may make sense to get additional liability insurance, usually enough to protect your net worth, including your home, savings, and other valuable assets, as you could be an inviting target for a lawsuit . “Think about your assets and what should be covered,” recommends Marty Sansone, vice president of insurance at insurance comparison site The Zebra.
But even if you have little or no net worth to protect, skimping on liability coverage is still risky — and for most drivers, there are much better places to cut corners. “Even someone with little net worth can be sued and have years of wage garnishment,” warns Cameron Magnuson of Magnuson Insurance.
How much uninsured or underinsured auto insurance do I need?
So-called UM and UIM covers protect you if you have an accident with a driver who is uninsured or underinsured. Drivers without insurance are less likely to be able to cover expenses such as medical bills and car repairs, so UM and UIM provide coverage in the event the other driver is unable to pay.
Some states require both types of coverage, while some states only require UM. Required coverage amounts vary by state, but often match the minimum coverage requirements for liability insurance policies.
- How much to get: Customize your liability coverage
- Consider cutting costs if: You have collision insurance (as well as health insurance)
According to the Insurance Research Council approx 1 in 8 drivers on the road are nationwide uninsured. This means that if you get into an accident with another driver, they may not have the necessary coverage to pay for your medical bills or damage to your car. UM/UIM covers damage to your car and any medical costs.
Of course, assuming you have health insurance, your doctor bills are already covered. But UM and UIM policies can still incur out-of-pocket costs, such as your deductible and any copays. It also covers medical bills for all your passengers and lost wages.
Because UM and UIM coverage is relatively affordable, with average costs of approx $4 to $6 per monthSansone recommends that you bring enough to meet the personal injury limits of your liability insurance policy.
At the same time, if you have collision insurance (more on that below) and a low deductible on your health insurance policy, this insurance may be largely unnecessary — and you may be safe with your state’s minimum.
How much PIP insurance do I need?
PIP, also known as no-fault insurance, covers your medical bills after an accident, as well as those of any passengers, regardless of who is at fault. It also covers costs such as lost wages.
PIP, or Personal Injury Protection, is not available in all states and only a few states require it.
Minimum coverage amounts vary by state. For example, New York requires drivers to carry $50,000 in PIP insurance per person, while Massachusetts only requires $8,000 per person.
- How much to get: Enough to cover your health insurance deductible
- Consider cutting costs if: You’re comfortable paying your deductible for your health insurance
There are many variables that determine how much PIP costs, with typical costs ranging from $8 to $33 per month. If you don’t have health insurance, carrying PIP can be critical.
Even if you do, PIP can help fill gaps like paying your deductible and medical bills for any passengers. But if you have health insurance and want to lower your car expenses, you can probably skip this type of insurance.
How much collision insurance coverage do I need?
Collision cover covers damage to your own vehicle in the event of an accident. This could include damage sustained in a collision with another vehicle, including hit and runs, or an object such as a tree or guardrail.
Collision coverage – which is optional if you own your car outright, but usually required if you rent a car or have a car loan – costs on average $25 per month, according to the Insurance Information Institute, an industry association. The limit of coverage is usually the cash value of your car and drivers must choose a deductible. The average is about $500.
- How much to get: The cash value of your car
- Consider cutting costs if: Your vehicle is worth less than 10 times the insurance premium
This type of insurance makes the most sense if you have a new car or if you are having a hard time paying for a major repair out of pocket.
One way to save on collision coverage is to increase your deductible, which can dramatically reduce your monthly bill while still protecting you in the event of a serious accident. For example, according to Progressive, a A $100 deductible costs an average of $70 per month. But for drivers willing to take the risk of bumping that up to $2,000, the average monthly premium drops all the way to $22.50.
If your car is older so it’s not worth much on the resale market — and if you can commit to paying for any repairs out of pocket — it may make sense to skip collision coverage altogether.
How do I say? An industry rule of thumb says that if your car is worth less than 10 times your annual collision insurance premium, it may not be worth it, said Mark Friedlander, spokesman for the Insurance Information Institute, a trade group.
How much comprehensive insurance do I need?
Comprehensive covers damage to your vehicle due to theft, natural disasters or other causes not covered by the collision insurance. For example, it may cover repairs if someone steals your catalystor if a tree branch falls on your car.
As with a collision, comprehensive is generally required if your car is leased or financed, but otherwise almost always optional. It usually costs about $14 per monthaccording to the National Association of Insurance Commissioners.
As with collision insurance, the limit of coverage for comprehensive insurance is typically the cash value of your car. Drivers must choose a deductible when purchasing this type of coverage. The average deductible is around $500.
- How much to get: The cash value of your car
- Consider cutting costs if: You have an older, less valuable car
According to experts, the value proposition for extended coverage is much the same as for collisions.
Your vehicle probably doesn’t need collision coverage if “you can replace it without significantly dent your budget,” suggests Paul Moss, founder of auto insurance comparison tool HeyDriver!
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