Understanding Car Insurance: How Much Do I Need?

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by Carter Kilmann

More likely than not, the bare minimum amount of car insurance isn’t enough.

If you’re a new or soon-to-be car owner, you might feel pressed to answer a vital, but common question.

“How much car insurance do I need?”

For a simple question, it doesn’t have the simplest answer. Auto insurance is complicated. When you buy a new car, you have to consider various types of insurance and levels of coverage. And if you take out a loan to purchase your vehicle, your lender could have additional car insurance requirements.

On top of that, every state’s car insurance requirements are different.

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How Much Car Insurance Do I Need For My State?

Insurance is regulated at the state level, so it makes sense that minimum auto insurance coverage requirements vary from state to state. But almost every state requires liability insurance. So, if you cause an accident, your policy will at least pay for some of the damages you caused.

There are several online tools you can use to find your state’s minimum requirements. For example, Geico’s state-by-state overview tool is a good place to start.

You may feel tempted to sign up for the cheapest and bare minimum insurance policies, but it’s at least worth reviewing all of your insurance options. That’s the only way to ensure your policy meets your needs and preferences.

Don’t make a hasty decision. Instead, prevent future stress and hefty costs by exploring different car insurance coverages.

Let’s start by walking through car insurance basics and terminology.

What Is Car Insurance?

Car insurance protects you, your car, and your wallet. It’s a safeguard against car accidents, vehicle theft, and other incidents outside of your control. Keep in mind that auto insurance doesn’t cover every type of auto expense, like general wear-and-tear or maintenance. Vehicle service contracts and manufacturer warranties may cover unexpected mechanical failures and repairs that car insurance won’t.

A lot can happen on the road — or in parking lots, neighborhoods, and driveways. If you’re in an accident, car insurance can help you cover repairs or medical expenses. Without car insurance, you’d be looking at a hefty bill.

It doesn’t matter if you have a car, truck, or SUV. If it’s street legal and transports you from place to place, it qualifies for car insurance.

Overview of Car Insurance Terms

Car insurance policies aren’t exactly light reads. But they’re a lot easier to navigate when you know and understand insurance terms. Don’t worry, we’ll refrain from reading too much like a textbook.

Premium

Premium is just a fancy term for the dollar amount you pay for insurance. Typically, you’ll make monthly premium payments, but that depends on your insurance company. It’s not unheard of to pay quarterly, semiannually, or even annually. In fact, you can get a discount for paying your premium in full.

There isn’t a universal auto insurance premium. How much you pay for insurance is based on a number of factors, such as your age, vehicle, primary residence, driving history, and, in most states, your credit.

Deductible

Although it’s a mouthful of syllables, a deductible isn’t as complicated as it sounds. A deductible is a dollar threshold — like $250 or $500. It’s essentially the share of costs you’re responsible for in the event you’re in an accident.

For example, let’s assume your deductible is $250. If you got in an accident and the covered repair costs were $1,000, you’d be responsible for $250 while your insurance provider would cover the remaining $750. On the other hand, if your final repair bill is less than your deductible, it’s all coming out of your pocket.

Keep in mind that deductibles usually reset with each claim. In other words, if you got in another accident, you’d still be responsible for the first $250.

Coverage

As a driver, you’ll have multiple types of coverage. “Coverages” represent the specific incidents that your car insurance policy will help with. Your car insurance policy will also have coverage limits. This represents the maximum amount of money your insurance company will pay for each type of coverage you have.

Let’s walk through an example. If you have liability coverage, your liability policy can help you pay for third-party costs if the accident is your fault. Your policy could have 25/50/10 liability limits, which covers:

  • $25,000 for bodily injuries per person
  • $50,000 for bodily injuries per accident
  • $10,000 for property damage per accident

Lastly, you may have heard of the term “full coverage.” This usually refers to some combination of auto insurance coverage, but there isn’t a universal definition. Full coverage is subjective since coverage requirements differ by state and personal situation.

Now that you’re familiar with car insurance terms, let’s walk through the various types of car insurance coverage.

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Common Types of Car Insurance Coverage

Sorting through car insurance coverages can be a headache. To alleviate that pain, we’ve outlined the common types of car insurance coverage for you.

Liability

If you cause an accident, you’re liable for the damages. Medical costs and vehicle repair costs add up quickly. That’s where liability coverage comes into play. Liability insurance, which is required in most states, helps pay for the other person’s expenses.

There are two types of liability insurance:

  1. Bodily injury liability (BIL): If you cause an accident, BIL can help you pay for costs associated with the other party’s injuries.
  2. Property damage liability (PDL): If you cause an accident, PDL can help you pay for damages to the other party’s property.

Comprehensive

Even when you’re not on the road, your car is still susceptible to damage. Comprehensive coverage protects your vehicle against acts outside your control, such as natural disasters, fires, auto theft, and vandalism. For example, if your car isn’t garaged and endures a barrage of hail damage, a comprehensive coverage policy could help you pay to repair the damage.

Although comprehensive insurance is typically optional, your auto loan lender could require it if you still have an outstanding loan balance.

Collision 

Accidents happen. And not necessarily with other vehicles. Whether you’re in a hit-and-run or you back into a light pole, collision coverage can help you pay for auto repairs or even a replacement vehicle. Keep in mind that collision insurance only relates to damage to your vehicle.

Though it’s usually optional, your lender could require you to include collision coverage in your policy.

Uninsured or underinsured motorist 

While most states impose minimum car insurance requirements, that doesn’t mean everyone actually has car insurance. Uninsured motorist coverage (UM) protects you when you’re hit by an uninsured driver.

Similarly, some drivers won’t have high enough liability coverage limits to cover your accident-related costs. Underinsured motorist coverage (UIM) accounts for this situation.

UM and UIM are only required in some states.

Medical payment

It doesn’t matter who’s at fault, medical payment insurance (MedPay) can help pay the medical bills of the insured driver and any passengers in the event of an accident. Medical payment coverage can be used to offset high health insurance deductibles — at least for car-related injuries.

If you select a MedPay policy, you’ll choose a coverage limit, which can be applied to medical expenses if you’re in an accident. For example, let’s say you have a coverage limit of $1,500 and you hurt your leg in a car accident. After visiting the doctor and getting an X-Ray, your medical bills total $1,200. Since that’s under your coverage limit, it’s covered by your MedPay policy.

While it’s only required in some states, MedPay can balance a high health insurance deductible if you’re worried about the potential cost burden of car accident medical expenses.

Personal injury protection

Whereas MedPay only applies to medical bills, personal injury protection (PIP) also applies to expenses incurred as a result of an accident-related injury. In addition to medical bills, a PIP policy could help pay for lost wages, household services, and rehab costs. For example, if you’re in an accident, a PIP policy could help you pay for childcare while you’re recovering.

PIP coverage varies by state and is only required in some states.

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Other Types of Insurance Coverage

Although less common, there are several additional coverage options at your disposal. From roadside assistance to rental cars, car insurance companies have policies for just about everything. They aren’t required and may not be worth the higher premium, but that depends on your preferences, driving history, and vehicle condition.

Gap insurance

If you leased or financed your vehicle, gap insurance is worth exploring. Gap insurance, which is also known as loan/lease payoff, ensures you’re able to repay your outstanding loan or lease balance in the event your car is totaled or stolen.

For example, let’s say you have a $15,000 loan, but your car’s value has depreciated to $10,000. Now, let’s assume you’re in a serious accident that totals your car. With a gap insurance policy, your insurance provider would pay you $10,000 (the cash value of the car) plus $5,000 (the difference between the car value and loan amount). As a result, you’re able to pay off your loan.

Keep in mind, you’d need comprehensive and collision coverage before you can add on gap insurance. This coverage will also end when your insurance policy ends.

Alternatively, you can purchase a GAP waiver when getting an auto loan or refinancing. This is a standalone product that waives the remaining loan balance up to a specified amount.

Rental reimbursement

As the name implies, a rental reimbursement insurance policy covers the price of a rental car while your vehicle is in the shop. If losing access to your car would severely disrupt your lifestyle or work schedule, it could be worth adding onto your existing policy.

Towing and labor cost

Another optional coverage, towing and labor cost insurance protects you in the event your car breaks down. It covers roadside repair costs for a variety of common car problems, such as flat tires, dead batteries, and lockouts. So, if you’re driving an old or unreliable vehicle, this insurance could be beneficial.

Before you add this coverage, review your existing policies to ensure this coverage isn’t included in another policy, such as comprehensive. Or, if you have AAA, you wouldn’t need this roadside assistance policy.

Note that his coverage does not apply to any costs for new parts or expenses incurred at a repair shop.

Rideshare insurance

Thanks to Uber and Lyft, ridesharing has boomed over the last decade. Driving for these companies has become a popular and viable source of income.

If you drive for one of these platforms, rideshare insurance could be beneficial — especially if you use your personal car to transport riders. Your own car insurance policy won’t cover commercial use of your vehicle.

How Much Car Insurance Do I Need to Refinance My Car Loan? 

The straightforward and somewhat predictable answer: It depends on the lender.

That said, when you take out a car loan or refinance loan, your lender will often require you to have more than the state minimum coverage requirements. This ensures you’re not forced into a financial hole if you’re in a costly accident.

Lenders may even prohibit you from choosing a high deductible. Why? Because it’s riskier to choose a lower premium for a higher deductible. If you got in an accident, you’d be responsible for more of the related costs. Lenders are risk-averse, so these requirements alleviate potential concerns about extending a customer a loan.

It’s also important to keep your car insurance policy throughout the life of your auto loan. If a borrower lets their car insurance expire, a lender could also impose its own car insurance coverage. This is called force-placed insurance. Although it’s rare, force-placed insurance is often a lot more expensive than if the borrower had simply kept their own insurance policy.

One Last Thought on Car Insurance

Before you take out an auto loan, make sure you understand both your state’s and lender’s car insurance policy requirements.

Even if your lender doesn’t require more coverage than your state minimum, that doesn’t mean it’s always wise to purchase the minimum. Minimum doesn’t mean optimal. Additional coverage may be worth the higher premium.

It can help to speak with an insurance agent if you don’t know where to start.

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