Finding the Car Insurance Coverage That's Right for You
Many people view car insurance as a necessary evil. Making monthly insurance payments, especially when you've never had an accident, seems like a waste of money. But when you DO have a claim, auto insurance can be a financial lifesaver. Besides -- and this is no small detail -- automobile insurance is required by law.
Herein lies the age-old question: If you're required to have car insurance, exactly how much do you need and what kind of coverage should you buy?
To help, we've put together a handy guide to assist you in identifying the type of insurance, and the amount of coverage, that's right for you. All of this information will be helpful to know when it comes time to obtain a car insurance quote.
Auto Liability Insurance - The Basics
Let's start with the basics. Auto liability insurance protects the person you hit if an accident is your fault. It's divided into three numbers representing dollar amounts for three types of liabilities. For example, if you purchased an auto liability policy of 25/50/15, you would have $25,000 of bodily injury coverage for one person injured in an accident, $50,000 of bodily injury coverage for everyone injured in an accident and $15,000 of property damage coverage.
Determining how much auto liability coverage you need depends on two primary factors.
The first factor is the minimum amount of coverage legally required by the state in which you live. In some cases, there is no minimum amount. It's important to remember each state has its own criteria, so ask your insurance carrier what's required for your state.
The next factor depends on your financial situation. If you're at fault in an accident and someone else is injured but your auto liability doesn't cover all of their medical bills, chances are they -- and their lawyer -- will come after you for the remainder of the amount. It's suggested that if you're a high-wage earner, a home owner or an asset holder, you should have higher limits compared to someone who doesn't own their own home, someone who has no real significant assets or someone whose income is lower. For ideas on how to finance your policy, read our article on the 10 Ways to Save Money on Auto Insurance.
Bottom Line: If you have finances and assets worth protecting, opt for higher liability coverage amounts.
Deciding on Personal Injury Protection (PIP)
Simply put, personal injury protection covers you and your family members in the event of an injury during an accident. People who currently have health insurance for themselves and their family members usually opt out of the personal injury portion of their car insurance policy, unless it's required by the state in which they live. Be sure to ask your carrier what the personal injury requirements are in your state.
Bottom Line: If you have health insurance for you and your family, personal injury coverage is usually unnecessary, unless your state tells you otherwise.
A Lesson in Comprehensive and Collision Coverage
If you're currently leasing a vehicle or have a car loan, the lien holder requires you to have comprehensive and collision coverage. Comprehensive covers non-accident-related damages to your vehicle, such as those caused by fire, flood or hail. Collision covers damages to your vehicle caused by impacts with other cars or objects.
If you own an older vehicle outright, you may not need comprehensive and collision. As a general rule, consider dropping them if the annual costs are more than 10 percent of the current value of your car. Also remember that the type of car you drive can affect your automobile insurance; new cars, or cars that are more likely to be stolen might warrant a higher premium. Read our article on the most and least expensive cars to insure.
Bottom Line: If your older car is worth $4,000, for example, and your comprehensive and collision coverage costs are more than $400 a year, you probably don't need them.
Medical Payments Coverage
At face value, medical payments coverage and personal injury protection (PIP) are nearly identical. However, medical payments coverage starts where personal injury protection stops. For example, if medical expenses for the driver or passengers exceed the dollar amount covered by PIP, medical payments coverage would be used to pay part or all of the remaining expenses, depending on the policy's coverage amounts.
This is especially important in states where PIP only covers a certain percentage of overall medical expenses. If only 80 percent are covered, this means the policyholder is on the hook for the remaining 20. As such, medical payments coverage adds an additional layer of protection for the policyholder, especially when serious injuries are involved.
Bottom Line: Medical payments coverage may not be necessary, except in cases where personal injury coverage is less than 100 percent.
The Uninsured and the Underinsured
There's nothing worse than being involved in an accident with someone who doesn't have car insurance or someone who doesn't have enough car insurance to cover the damages or the injuries involved when they're at fault. Even though it's optional, uninsured motorist coverage is a good idea. What's more, consider adding a collision deductible waiver that relinquishes your deductible-paying responsibility in the event that you're involved in an uninsured motorist accident. Both options are affordably priced and worth every penny.
Bottom Line: Don't foot the bill if you're in an accident with someone who is at fault but uninsured. Uninsured motorist coverage is a best bet.
To Tow or Not to Tow
Adding towing coverage to your auto insurance policy is entirely up to you. However, most automakers provide emergency roadside assistance for cars that are still under warranty. What's more, motor clubs like AAA offer emergency roadside assistance in addition to all the perks that go along with your membership. If you don't belong to a motor club and you're driving an out-of-warranty car, you might consider opting for towing coverage since your insurance company will usually offer the lowest rates.
Bottom Line: Nix the towing coverage and go with AAA instead.
Rental Car Reimbursement
Chances are, if someone hits you and you need a rental car after the accident because yours is being repaired, the car insurance company of the person at fault will cover the expense. However, you may need rental car reimbursement coverage if you're at fault or if you were involved in an uninsured motorist accident.
Bottom Line: Good if you've got it, not bad if you don't.
When it comes to car insurance coverage, cheaper isn't always better. Be sure to do your homework to find a balanced policy -- one that covers you adequately in the event of an accident but one that doesn't make you pay for coverage you don't need. Most importantly, don't skimp on liability coverage. It's better to pay a few hundred dollars more a year than to wind up in the poor house from accident litigation.
Our article on the Five Things You Might Not Know about Car Insurance sheds further light on factors to consider when choosing a policy. And to help you choose the perfect insurance partner, our article, How to Choose the Right Auto Insurance Company, covers everything from getting insurance quotes to checking the provider's consumer complaint ratio.