How Much Coverage Do You Need?
In order to determine how much automobile coverage you need, you should probably take into account the following three factors:
- your car.
- where and how it is driven.
- how many assets you have to protect.
In general, you are required by law to have Liability coverage (Bodily Injury and Property Damage). There are minimum coverage amounts required by your state, and, if you are buying or leasing a vehicle, there may also be minimum amounts required by your insurance company and/or lien holder (bank, finance company, etc.). To find out the required coverage and minimum amounts in your state, go to the “Choosing Your Coverage” section.
In addition to Liability, you may also want to purchase Comprehensive and Collision insurance to cover your vehicle. Collision covers any direct and accidental loss to your car caused by colliding with an object, such as another car, a wall, a fence, etc.
Comprehensive covers loss to your car from fire, theft, break-ins, vandalism and natural disasters such as an earthquake, flood, hail or hurricane.
The combined Collision and Comprehensive coverage is the most expensive part of your auto insurance, generally costing about one-third of the total premium. If you are buying or leasing your car, your lien holder (bank, finance company, etc.) may require you to carry Comprehensive and Collision coverage to protect their interests. If you own your car, many experts recommend skipping Comprehensive and Collision if your car’s resale value is less than $3,000.
Where and How Your Car Is Driven
Where, why and how far you drive – even where you live – are important factors when deciding how much coverage you need.
Generally, theft and accidents rates are higher in densely populated areas. Big cities also tend to have more uninsured drivers. If you live in a city or high-risk area, you should take this into account when deciding on your Comprehensive and Collision coverage.
The primary use of your car can also affect your auto insurance rates. Most people use their cars to commute to work. If you have a second car or work out of your home, then you probably use your car mostly for pleasure. People who use a car for work generally drive more miles than someone who uses a car simply for pleasure. Business use of a car would be driving it every day for business, such as realtors, pizza delivery persons and those who carry passengers for a fee. This, again, generally means an increased use of your car. Research has shown that the more you drive, the more likely you are to be in an accident.
How Much You Have to Protect
The main part of your insurance protection, and the one that is required by law in most states, is your Liability coverage. A part of Liability coverage is Bodily Injury, which covers injuries to a person as a result of an accident. Within Liability coverage there is also Property Damage, which covers damage to or loss of someone else’s property. While each state has minimum requirements, you also need to consider how much insurance coverage you need to protect your personal assets as well.
If you do not have adequate coverage, and you are sued, the court could order you to pay more than your limit of Liability coverage. You would, then, have to dip into your personal assets to cover the amount ordered paid by the court. Therefore, if you have a home, bank accounts and a reasonably well paying job, you should buy more Liability coverage than the minimums required by law. Many experts recommend at least $100,000 per person and $300,000 per accident for Bodily Injury and at least $50,000 for Property Damage.
Others experts insist even those amounts might not be enough. The more assets you have, the more you need to protect. So, you may want to estimate your net worth and use that figure as a basis for determining how much coverage you would need. To do this, total:
- the equity in your home and other property.
- the value of major possessions such as automobiles and art (less any amount that may be securing a debt).
- any savings or liquid investments you have.
- any non-IRA or employer provided pension or retirement benefits you have.
The total value of all these things, plus an added amount for safety, is what many experts feel you would want your Liability coverage to protect – not just the minimum amount the state requires or even the generally recommended amounts if they are far lower than your net worth. This is where umbrella coverage can be very valuable. If you own a home, you might be able to get umbrella coverage that could provide up to $1 million in total coverage.
To find out what coverage is required in your state, go to the “Choosing Your Coverage” section.