Choosing the right amount of car insurance is a balancing act between protecting yourself financially and avoiding overpaying for unnecessary coverage.
Many drivers make the mistake of choosing minimum coverage to save money, only to face devastating financial consequences after an accident. This guide breaks down the key steps to help you calculate the coverage that fits your needs.
Choose Between These 3 Common Car Insurance Liability Limits
Common liability limits are the maximum your car insurance will cover if you cause an accident. These limits determine how much insurance companies will pay for injuries per person, for everyone hurt, or for damage to property. Most standard insurance policies come with three main coverage limits, each telling you exactly how much protection you have when accidents happen.
1. $25,000 for bodily injury per person
This coverage handles medical expenses for injuries you cause to others, including emergency room visits, surgeries, and ongoing treatment. While $25,000 might seem like adequate coverage, it gets depleted quickly with serious injuries. A single overnight hospital stay can cost between $10,000 and $15,000.
Add in one MRI, pain medication, and several follow-up appointments, and you have already reached your coverage limit. At this point, you become personally responsible for any additional costs.
Here’s just one example of a common scenario spiraling (using made-up but realistic numbers): You rear-end someone at a stoplight, causing them whiplash and a concussion. The initial ER visit costs $3,000. They need physical therapy twice a week for six months at $100 per session ($4,800), regular appointments with a neurologist ($2,000), prescription medications ($1,200), and multiple imaging scans ($8,000).
Their lost wages from missing work add another $10,000. The total quickly reaches $29,000. With only $25,000 in coverage, you might need to pay $4,000 out of pocket, plus any future medical expenses they might have.
2. $50,000 in total bodily injury per accident
This coverage handles multiple injured people in a single accident but must be split between all injured parties. Consider that one ambulance ride alone can cost $1,200 to $1,800. The $50,000 total bodily injury coverage becomes insufficient when an accident involves multiple people.
A typical scenario might include a driver, their passenger, and potentially a pedestrian. The $50,000 limit needs to cover everyone’s medical expenses, which adds up quickly with modern healthcare costs.
Here’s an example of how this can play out: You run a red light and hit a car with a family of four. The driver needs surgery for a broken arm ($20,000), their spouse has severe bruising and whiplash ($8,000), and their two children need ER visits and follow-up care ($12,000 each).
The total medical expenses reach $52,000 and could go well above that. Your insurance only covers $50,000, leaving you personally responsible for $2,000 plus any additional treatments they might need. This scenario shows how even a relatively minor accident with multiple injured parties can exceed your coverage limits.
3. $25,000 for property damage per accident
This coverage pays for damage to others’ vehicles and property, including buildings, fences, or other structures. With the average new car costing over $48,000, this coverage often falls short. Most vehicles in any parking lot cost more than the $25,000 limit. One accident with a new SUV could leave you paying thousands out of pocket beyond your coverage limit.
The property damage becomes even more complex when multiple vehicles or structures are involved. Imagine sliding on ice and hitting a parked Tesla Model 3 ($40,000) and a storefront window ($5,000). The Tesla repairs cost $32,000, and the storefront damage totals $8,000.
Your $25,000 coverage leaves you $15,000 short. Plus, the business owner might sue for lost income while their window gets repaired. This shows how quickly property damage can exceed basic coverage limits, especially in urban areas where luxury vehicles and expensive properties are common.
Disclaimer
Common liability limits vary by state. Some states, like California, require as little as $15,000 per person in minimum liability coverage for bodily injury. Other states mandate up to $100,000 in coverage, like Alaska, which has much higher minimums requiring $100,000 per person for bodily injury. States like Florida require Personal injury Protection to cover medical expenses regardless of who caused the accident.
How To Calculate the Right Coverage
Figuring out the right coverage helps you avoid overpaying while making sure you’re protected if something goes wrong. It’s all about balancing what your state requires, what you can afford, and how much risk you’re willing to take. These four steps will help you find the right coverage for your situation:
Step 1: Research your state’s minimum requirements
Visit your state’s Department of Motor Vehicles (DMV) website to find detailed information about the minimum auto insurance coverage requirements. If you frequently travel to other states, ensure your coverage meets or exceeds the minimum requirements in those states to stay compliant.
State minimums are just a starting point. These basic requirements might not be enough to fully protect you in an accident, so consider increasing your limits for better financial security. Most insurance professionals suggest at least doubling your state’s minimum requirements. Don’t worry—we’ll show you a few resources to help you later on.
Step 2: Estimate your car’s current market value
Before choosing coverage levels, you need to know exactly what your car is worth today. Online tools like Kelley Blue Book and NADA guides make this process simple by calculating your car’s market value based on several key factors.
Your car’s worth goes beyond its make, model, and year. Any modifications or upgrades you’ve made can boost its value significantly. This includes obvious changes like a new paint job or upgraded sound system, as well as practical additions like backup cameras or advanced safety features. Even regular maintenance and keeping service records can affect your car’s value.
The biggest factors affecting your car’s worth are its current condition and mileage. A well-maintained car with 50,000 miles will be worth much more than the same model with 150,000 miles and visible wear and tear. Getting an accurate value helps you figure out the costs associated with newer cars vs. older ones.
Step 3: Assess your financial situation and assets at risk
Start by adding up your total net worth, including your home equity, savings accounts, and investments. This gives you a clear picture of what you could lose in a serious accident claim.
Your current income and future earnings also play a big role in choosing coverage. A higher salary means you have more to protect, as lawsuit payments can come from your future wages, too. Don’t forget about retirement accounts and other assets. Many people overlook these when choosing coverage, but they’re just as much at risk in a liability claim.
Step 4: Evaluate your risk tolerance
Your comfort level with financial risk shapes your insurance choices. Higher deductibles can lower your monthly premiums, saving you money upfront. But you’ll need enough emergency savings to cover that deductible if something happens.
Look at your monthly budget to find the right balance. Lower premiums might seem attractive, but make sure you can handle the out-of-pocket costs that come with them. Someone with a healthy emergency fund might feel comfortable with higher deductibles, while others might sleep better knowing they have lower out-of-pocket costs.
Example Calculations
Once you’ve gathered all your information, you can determine the right coverage amounts for your situation. Here are some real-world calculations to help you understand how to put these numbers together.
For a $30,000 car and $100,000 in assets, a good liability coverage would be 100/300/100. This means your insurance covers $100,000 for injuries to one person, $300,000 for injuries to all people in an accident, and $100,000 for property damage. These higher limits protect both your car and your assets if you cause a serious accident.
Your deductible choices also affect your protection. A comprehensive deductible between $500 and $1,000 means you’ll pay that amount for non-crash damage like theft or storm damage before your insurance helps. Similarly, a collision deductible of $500 to $1,000 sets your out-of-pocket cost for accident repairs.
The key is matching your coverage to your specific situation. These numbers make sense for many drivers, but your ideal coverage might differ based on your state, assets, and risk comfort level.
Coverage Recommendations for Different Scenarios
Picking the right insurance coverage isn’t one-size-fits-all. Your coverage needs to match your car’s value, your financial situation, and your comfort with risk. Most drivers fall into one of these three common coverage categories, each offering different levels of protection:
Minimal coverage (state minimums)
This is the basic level of insurance required by law in most states, covering the least amount of liability for bodily injury and property damage. Minimal coverage works best for older cars with little value or low-risk drivers who want to keep costs down. Many drivers choose this option when they have limited assets to protect or when their vehicle isn’t worth much more than their annual insurance premiums.
Minimal coverage comes with significant financial risks. When accidents happen, state minimum policies often fall short of covering real-world costs. Medical bills frequently exceed basic coverage limits, and property damage claims can quickly surpass minimum policy amounts. You become personally responsible for any costs above your policy limits, including expensive medical bills and repair costs that your basic coverage won’t pay for.
Standard coverage (liability + collision/comprehensive)
Standard coverage provides a solid middle ground, including both liability insurance for damages to others and protection for your own vehicle. The liability portion handles injuries and property damage you cause to others, while collision and comprehensive coverage protect your car from accidents, theft, weather damage, and other risks. This package suits drivers with moderately valuable cars and some savings to protect.
This coverage level brings higher premiums than minimal coverage but offers substantially better protection. Most drivers find the extra cost worthwhile because it prevents large out-of-pocket expenses after accidents.
Standard coverage typically includes deductibles between $500 and $1,000, letting you adjust your monthly costs based on how much you can afford to pay in an emergency.
High coverage (increased liability limits + comprehensive)
High coverage packages offer maximum protection through increased liability limits and comprehensive insurance. This option best serves high-income individuals and those with new or expensive vehicles. The coverage extends well beyond standard limits, often providing $250,000 or more in liability protection plus full replacement cost for your vehicle.
These comprehensive policies cost more premiums but provide the strongest shield against financial loss. They often include extras like rental car coverage, roadside assistance, and gap insurance for leased vehicles.
High coverage makes particular sense for homeowners, business owners, or anyone with substantial assets to protect, as it guards against lawsuits that could threaten your savings and investments.
5 Important Factors to Consider When Choosing Coverage
When choosing coverage, it’s important to think about your state’s insurance laws, your savings, and the value of your vehicle. You should also consider how often you drive and whether you’re willing to take on higher deductibles to lower your premiums.
1. State requirements
Every state has unique minimum insurance requirements drivers must meet to legally operate a vehicle. California requires at least 15/30/5 coverage, which breaks down to $15,000 bodily injury per person, $30,000 per accident, and $5,000 property damage. Given California’s high medical and repair costs, this minimum coverage often proves insufficient in real accidents.
Florida takes an entirely different approach to minimum coverage. The state only requires $10,000 in personal injury protection (PIP) and $10,000 in property damage liability. This system focuses on covering your own injuries regardless of who caused the accident, but the low property damage requirement leaves many drivers vulnerable to significant out-of-pocket costs.
Some states, like New Hampshire, don’t legally require car insurance but still hold drivers financially responsible for accidents. This means drivers must prove they can pay for damages out of pocket or face serious penalties. Most New Hampshire drivers still choose to carry insurance rather than risk their personal assets.
Finding your state’s exact requirements is straightforward. You can look up state-specific insurance requirements on each state’s Department of Motor Vehicles (DMV) website or similar government websites. Insurance requirements change periodically, so checking official sources ensures you have the most current information for your area.
2. Your financial situation
Your savings and assets will determine if you can handle higher deductibles or need more comprehensive coverage to protect your finances. Homeowners or people with significant assets should consider higher liability limits. A lawsuit after a serious accident could target your home, savings accounts, or future earnings, making proper coverage essential.
If you have an auto loan or lease, your lender will require full coverage regardless of your preferences. This protects their investment in your vehicle but also protects you from owing money on a car you can no longer drive. Many drivers keep full coverage even after paying off their loans because they can’t afford to replace their vehicles out of pocket.
Having health insurance can influence whether you need additional medical payment coverage on your auto policy. Good health coverage might reduce your need for extensive medical coverage on your car insurance. However, auto medical payment coverage can help with deductibles and copays your health insurance doesn’t cover.
Emergency savings play a crucial role in your insurance choices. A solid emergency fund can help you choose higher deductibles to save on monthly premiums. Most insurance experts recommend having at least enough saved to cover your deductible plus a few months of premiums. This financial buffer lets you optimize your coverage while keeping monthly costs manageable.
3. Vehicle value
Your car’s value is crucial in determining the right insurance coverage. Most insurance experts follow a simple guideline: if your annual comprehensive and collision premiums exceed 10% of your car’s value, you might want to reconsider full coverage. Paying $800 yearly to fully insure a $7,000 car often doesn’t make financial sense.
Some vehicles need special consideration. Classic and collector cars require specialized coverage based on agreed-upon value rather than standard market value. Regular insurance policies don’t account for these cars’ unique nature or potential appreciation. Meanwhile, leased vehicles must carry full coverage regardless of age or value. These contractual requirements protect the leasing company’s investment throughout your lease term.
Gap insurance becomes particularly important for newer vehicles, especially when your loan balance exceeds your car’s value. Since new cars typically lose 20-30% of their value in the first year, this coverage prevents you from owing money on a car you can no longer drive after a total loss.
For older vehicles worth less than $4,000, many drivers choose to drop comprehensive and collision coverage. At this value point, the cost of repairs might exceed the car’s worth. Instead of paying higher premiums, saving that money toward your next vehicle purchase often makes more sense.
4. Driving habits
It might seem inconsequential, but your daily driving routine significantly influences your insurance needs. Commuting over 30 miles daily increases your accident risk compared to someone who rarely drives. This higher exposure on the road, especially during peak traffic hours, might warrant additional coverage to protect against increased risk.
The type of driving you do matters, too. Regular highway driving brings different risks than city driving, with higher speeds but fewer stop-and-go situations. Also, business use of your vehicle requires special consideration. If you regularly use your car for work purposes beyond commuting, you might need commercial auto coverage.
Rideshare drivers face unique insurance challenges, often requiring special endorsements or separate policies for companies like Uber or Lyft.
Long-distance travel adds another layer of consideration. Regular trips across state lines or extended road trips might justify additional coverage like roadside assistance. This extra protection helps prevent costly out-of-pocket expenses when you’re far from home.
5. Risk tolerance
Your comfort level with financial risk shapes your insurance decisions. The key lies in finding the right balance between monthly premiums and potential out-of-pocket costs. Choosing a higher deductible can lower your monthly payments, but you’ll need to be comfortable handling larger expenses if something happens.
Opting for a $500 deductible instead of $1,000 typically increases your premiums by 15-30%. While this means higher monthly costs, it reduces the amount you’ll pay after an accident. This choice often depends on your emergency savings and monthly budget flexibility. Someone with limited savings might prefer paying more monthly to avoid a larger one-time expense.
In a Nutshell:
Here’s a quick summary of what you need to know about each type of coverage and how they work together:
Liability coverage
This essential coverage protects you financially when you cause damage to other people or their property in an accident. Most states require minimum coverage amounts like 25/50/25, but these minimums often fall short in real accidents. Going beyond state minimums provides better protection for your assets and future earnings.
Collision coverage
When you get into an accident, collision coverage pays for repairs to your own car, regardless of who caused the crash. While newer cars usually need this coverage, it becomes less important for older vehicles with low market value. Your lender will require collision coverage if you have a car loan.
Comprehensive coverage
Life brings unexpected challenges beyond accidents. Comprehensive coverage handles non-accident damage like theft, vandalism, weather damage, or hitting an animal. People often pair this with collision coverage for complete vehicle protection, creating a solid safety net for their investment.
Personal injury protection or medical payments coverage
Medical costs after an accident can add up quickly. Personal Injury Protection covers medical expenses for you and your passengers, regardless of who caused the accident. In no-fault states, this coverage is required and pays out even before fault is determined.
Uninsured/underinsured motorist coverage
With about 13% of drivers in the US lacking insurance, this coverage becomes particularly valuable. It protects you if someone hits your car but doesn’t have insurance or enough coverage to pay for the damage. Think of it as a backup plan for when other drivers aren’t properly insured.
4 Common Mistakes to Avoid When Getting Car Insurance
When getting car insurance, it’s important to avoid cutting corners on liability coverage, neglecting uninsured motorist protection, or overpaying for coverage on an older car. Regularly reviewing and updating your policy ensures you get the best value and protection for your needs.
Many drivers make these mistakes trying to save money in the short term, only to face much bigger costs down the road:
1. Skimping on liability coverage to save money
Choosing state minimums ($25,000) seems like an easy way to lower your insurance costs, but it creates major financial risks. A single accident with a luxury car worth $50,000 would leave you paying the difference out of pocket. Medical bills from a serious accident can easily exceed $100,000, putting your savings and future earnings at risk.
Saving $20 monthly on premiums by choosing minimum coverage might save you $240 per year, but one accident could cost you tens of thousands. Most drivers only realize they’re underinsured after causing a major accident when it’s too late to increase their coverage.
2. Ignoring uninsured/underinsured motorist protection
Around 14% of drivers have no insurance at all, leaving you vulnerable if they hit your car. Basic liability policies won’t help if an uninsured driver totals your vehicle. This critical coverage typically costs just $40-100 annually but provides crucial protection against uninsured drivers.
This protection becomes even more important in states with high rates of uninsured drivers. In Mississippi, for example, 29% of drivers lack insurance. Without this coverage, you could face substantial repair bills or medical costs, even if the accident wasn’t your fault.
3. Overpaying for unnecessary coverage on an old car
Many drivers waste money by paying $600 annually for collision coverage on a car worth only $3,000. Full coverage on a 15-year-old vehicle often costs more than the car’s value over just a few years of premiums. That money could be better spent saving for your next vehicle.
Consider dropping comprehensive and collision coverage when repair costs would exceed your car’s value. Instead of paying high premiums for minimal protection, put that money into a savings account for your next vehicle purchase.
4. Forgetting to review and update your policy regularly
Life changes like marriage or moving can qualify you for better insurance rates. Many drivers miss out on multi-car or bundling discounts simply because they never review their options. Your coverage needs also change as your car ages and loses value, potentially allowing you to adjust your coverage levels.
Annual mileage changes, like switching to working from home, could significantly lower your premiums. Regular policy reviews ensure you’re not paying for coverage you no longer need while maintaining protection for your current situation.
If you approach the situation correctly, you might even be able to lower car insurance premiums. To learn more, read my article, How To Lower Your Car Insurance: Negotiate With These 4 Steps. The article includes how to lower your car insurance and scripts to help get you there.
