How Do I Know How Much Auto Insurance I Need?

Updated on December 6, 2018
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Summer enjoys reading fiction and writing. She is a licensed Property and Casualty and Life Insurance Agent in 44 states and DC.

Why Do They Make It So Confusing?

Why Do I Even Need Auto Insurance?

Auto insurance is very important if you are licensed to drive. Even if you don't have a car, it's very important to have auto insurance all the time. We'll get into that later.

Auto insurance is an absolute necessity for drivers because it protects a driver's assets, including his/her car. There are several different things to choose from when you decide which types of coverage you want. There are also several different options depending on which state you live in. For the intents and purposes of this article, we will focus on the major coverage to choose from that are available in most states. We will also discuss the pros and cons of different companies to choose from.

So, the first thing to know about auto insurance is it's meant to protect you, your car, your body, your passengers, and your assets. If you were to hurt, kill or injure another driver, the insurance is still essentially protecting you from being sued.

Auto Insurance 101

Yes, It's Boring... BUT...

The amount of people in the United States who drive around without auto insurance is staggering. In Houston Texas alone, over 30% of all drivers have no auto insurance. This is scary especially when you consider that you are 35% more likely to be killed in a car accident in Houston than other cities in the United States. Why do people drive around with no insurance? There are several reasons.

1) People just don't have the money to pay it.

2) People quit paying their insurance and after it lapses for 30 days, it's impossibly expensive to get.

3) People get in accidents or have tickets which make insurance extremely expensive.

4) People don't know they don't have insurance. Their parents may have dropped them when they moved out, or perhaps their payment didn't go through and they were unaware they were driving without insurance.

The first lesson, before we get into limits and coverage, is IF YOU HAVE A LICENSE ALWAYS HAVE INSURANCE. You can get insurance as a non-car owner from some companies. The reason this is so important is that if you go without insurance for more than 30 days, your rates will skyrocket. Coupled with the fact that it's illegal to drive without insurance, and causing an accident without insurance could financially ruin you for life, it's more than a good idea to always have insurance.

Can You Pass the Auto Insurance Test?

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Oh Yeah? What Happens If I Just Don't Get Insurance?

This is a question I get often from customers who get high quotes from having lapses in their insurance.

If you get pulled over and you do not have insurance, depending on how many times it's happened before, you'll likely get a ticket and have to pay a fine, and prove to the court that you've purchased at least the state minimum liability insurance.

If you get in an accident and you do not have insurance, several things can happen.

1) You are hit by an uninsured motorist and it's not your fault. But, you don't have insurance either. You're responsible to pay to fix your car.

2) You are hit by a person who has insurance but you don't. It's not your fault. If the police come you will get a ticket for not having insurance. Also, if that person doesn't have enough insurance to cover your injuries, damage to your vehicle, or doctor's appointments for your broken arm for instance, you are just going to have to deal with paying the extra. Also, you may wait forever to get your car fixed depending on the other person's insurance because you don't have a company who can immediately make your repairs and subrogate out for payment after your car is fixed, which is how a lot of insurance companies take care of their people.

3) If you hurt kill or injure another person or damage another person's property and you don't have insurance, that person can sue you for everything you have, including your home or equity in your home, your investments, your savings, and your future income. You will have no lawyer to represent you from your insurance company. You could literally be in financial ruin for the rest of your life.


Don't Wait And Make it Too Late

Three mistakes are extremely common when it comes to auto insurance.

1) People wait to get it or never bother to check if they have the proper coverage.

2) People don't pay their insurance and experience a lapse of coverage.

3) People purchase new vehicles WITHOUT checking to see how much the insurance on the new vehicle will be. If it's more than expected, they get upset when they find out how expensive it is. BEFORE you purchase a car, call your insurance agent and get a quote for how much it would be to add the vehicle to your policies so there are no surprises.

Penalties for Driving With No Insurance Can Be Steep

In the Know

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How Much Liability Insurance Should I Have?

'How much liability insurance should I have' is an excellent question. It's also one worth taking time to find an answer to.

All states will require you to have liability coverage, also called 'bodily injury.' This is the first coverage listed on almost every insurance policy in the United States. Liability coverages vary from state to state, but one thing remains constant- you should have enough liability coverage to protect your assets (your home, auto, 401K, savings), as well as two years of your salary. This protection comes into play if you hurt, kill, or injure another driver or person in an at-fault accident.

When you look at your insurance policy, you may see your liability coverage listed with three numbers and two slashes. For example; 100/300/100 or 50/100/50. It's very important to know what these numbers mean.

In the example above, (we'll use the 100/300/100 example), the first 100 means that if you were to hurt, kill or injure another person, your insurance company would pay up to $100,000 to that person for their medical bills, injuries, lost wages, or funeral expenses. The '300' means that if you were to hurt, kill or injure more than one other person, your insurance company would pay up to $300,000 in total for the injuries caused to all parties. So, if you were at fault in an accident and hit a vehicle with 5 passengers, your insurance company would pay up to $300,000 for the injuries of those 5 passengers, but no more than $100,000 to one person. Perhaps one person had serious medical issues, while another person only needed stitches. In that case, your insurance company might pay $100,000 to the first person, and $5500.00 to the second person. The total amount paid by your insurance company for the incident will not exceed $300,000 in total.

The last number of the 100/300/100 coverage is how much your insurance company will pay to fix another person's vehicle or property. So, if you hit a car and in turn, that car hit a mailbox, your insurance company would pay up to $100,000 in 'property damage.' For example, the auto repair may cost $10,000 and the mailbox may cost $500.00. In this case, your auto insurance would pay out the $10500 because your property damage liability coverage is up to $100,000.

What if the amount of damages exceed the amount of coverage you have?

This question is asked far too often, after the fact. If personal injury expenses exceed the maximum amount your insurance will pay out, you can be sued for your assets. You can be sued for your home, your car, your 401K, your savings, and, the normal rule of thumb is up to two years of your salary. This is why it's important to have proper coverage. The United States is a very litigious nation and one at fault accident can lead to thousands of dollars in court costs, lawyer fees, and payouts if your insurance isn't 'enough.'

Okay, well what about Uninsured Motorist Protection? Do I Need It?

Most states offer something called Uninsured or Underinsured Motorist Protection. This coverage protects you in the event that someone hits you and they have no insurance or not enough insurance. So, for example, if you were to be hit and injured by an uninsured motorist, and you needed medical care as well as repairs to your vehicle, your 'UIM' coverage would pay out to fix your car and pay for your pain and suffering.

Do you have to have this coverage? In most states, you do not. In some states, you have to sign or initial a form stating you do not want the coverage.

What if I am hit by an uninsured motorist and I don't have this coverage? If you have no uninsured motorist insurance, your liability insurance will pay to fix your vehicle and for your medical expenses.

What's the point of having UIM if my liability insurance will cover me? This is an excellent question and one worth delving into. If you have no UIM insurance, your liability will cover you, however the accident will count against you. If you have accidents on your record, the price of your insurance will go up. Also, you would be responsible for paying your collision deductible before your vehicle is fixed. If you have a $1000 deductible, this uninsured motorist can be a real pain and very expensive. While you'll save money by not having to pay for the UIM insurance, you will lose money in the long run if you have an incident with an uninsured motorist.

On the other hand, if you have UIM protection, the accident will not count against you. Not only that, but your deductible to get your car fixed with be minimal. Most companies charge no deductible, or a deductible of no higher than $250.00.

UIM

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What's The Difference Between 'Full Coverage' and 'Liability Only'?

This is a very frequently asked question, and before we discuss this any further, it's important to keep one thing in mind. Full coverage insurance protects YOUR vehicle. It has nothing at all to do with another person's vehicle.

Full coverage is available to you for two major potential losses.

The first is a collision loss. You may see something on your insurance bill called 'Coll' or 'Collision.' The second in 'Comprehensive Loss,' which may be listed as 'Comp' on your policy. If you have full coverage, you will be responsible for your deductible and then your insurance company will pay the rest.

What's the difference between collision and comprehensive coverage?

Collision insurance covers your vehicle if you were to hit another car or another person's property. It also covers things like debris in the road and hitting a pot hole.

Comprehensive insurance covers your vehicle if you have hail damage or flood damage, if you hit a deer, or if someone steals your vehicle. Comprehensive losses are less likely and they are considered no-fault accidents and incidents.

If you only have liability insurance, your insurance company will not pay to fix your car in either of the above scenarios. Liability insurance only covers other people and the property of other people.

The Cost of Full Coverage Insurance

Full Coverage: What Should My Deductible Limits Be?

There are a couple of things to remember when thinking about having 'full coverage' on your vehicle.

  • If you have a loan or if you lease your vehicle, you MUST have full coverage insurance. This protects the lender in the event you total your vehicle. Your insurance company will pay out an amount they deem is fair for your vehicle. This payment will go to the lien holder.
  • The cost of your insurance will go up the lower your deductible is, and go down the higher you set your deductible.

Many people want to know how to set their deductibles. The rule of thumb is, set them to something you can afford to pay out if you are in an accident. If you are comfortable paying $500.00 if your car is damaged due to an at-fault accident, then you should set your deductible to $500.00. If you are comfortable paying $250.00 and you are okay with your premium being a bit higher, then set your deductible for $250.00. Most deductibles will be $100, $250, $500 or $1000. Several companies offer other increments but the former are the major increments for deductibles in the United States. Some people hike their deductibles up to $1000 or more to lower their premium/monthly payment. You should have a discussion with your insurance agent to decide which deductible is best for you.

If you're wondering if your car is 'worth' having full coverage, there are a couple of things you can do. Look up your car's current value with Kelley Blue Book online. For example, if you have a 2015 Toyota and it's worth $16,000, you probably want to have full coverage so that you can get a fair price for it in the event of a total loss. Furthermore, you'll likely want to have the vehicle fixed if it's possible to avoid having to buy a new vehicle. If you don't have full coverage, your insurance company will give you nothing.

If you are driving a 1993 Dodge Neon, chances are you'd get very little for that vehicle in the event of a total loss, and no body shop would fix it if it were damaged. This is when it's not a good idea to have the expense of full coverage insurance.

The most important thing is to do your research and find out your car's value, and then do whatever is most comfortable for you.

What's 'Umbrella' Insurance? Do I need it?

Umbrella insurance is an excellent idea for people who have a lot of assets to cover, and for people who have auto and homeowner's or renter's insurance. Think of the umbrella as covering 'literally' your home and your car.

If you are in an accident and you are sued for more than your maximum amount of liability, your 'Umbrella Coverage' is extra coverage to protect you. So, for example, if you had liability coverage of 250/500 and you are in an at-fault accident, and you seriously hurt four people in the car you hit. If the four people sue you but they have more injuries and medical payments than $500,000 total, your umbrella policy will kick in and pay the rest.

Umbrella policies are sold to people who have multiple lines of insurance, and they are usually valued at $1,000,000. Normally, you need minimum liability coverage of at least 100/300 to purchase umbrella insurance, or in many states 250/500.

What About Medical Payments or Personal Injury Protection? Do I Need It?

Many states offer medical coverage and personal injury protection to people who want it. More and more states are making clients sign or initial a form stating you reject the coverage if you don't want it.

Medical payments is money used for you and your passengers in case someone is injured in your car. Medical payments are NOT mandatory in most states. They can be used to pay your insurance deductible or for a trip to the doctor or the emergency room. Medical payments MAY be subrogated and they are taxed.

Personal injury protection is normally a better option for medical payments. 'PIP' coverage will give money to you and your passengers in case someone is injured in your car. However, sometimes PIP coverage will also cover lost wages, and in most states PIP coverage can NOT be subrogated and are not taxed.

I Have No Accidents or Tickets- Why Is My Insurance So High?

Insurance premiums take a lot of things into consideration. These insurance calls are sometimes called 'financial responsibility scores.' The main thing that insurance companies take into consideration is your driving record, including accidents or tickets you have had. Every state has a specific number of years that accidents and tickets will 'count against you.' For example, in California an accident stays on your record for 5 years. In Missouri, an accident stays on your record for three years.

While insurance companies take your driving record into consideration, the formula for premium is much more complex. Your premium depends on your credit. The insurance company will pull a 'soft hit' on your consumer report (it won't affect your credit score), and if your credit is really great, chances are your premium will be very low. If you have terrible credit, chances are you'll have a high premium.

Insurance companies also look at how long you've been with your current insurance company. The longer you've been with one company, the more stable you look, and the your premium will be less expensive than someone who jumps from company to company every six months.

Other things are factored in as well. Some insurance companies will give you certain discounts, like discounts on 'safe driving' and being 'accident free.' Almost all insurance companies look to see how long you've lived at the same address. The longer you have been at one address, the better. Insurance companies like this because it makes you look stable.

If you are an elderly driver or a person younger than twenty-five years old, your insurance will cost more because you are considered a higher risk. If this is the case, you can always assign your young or elderly driver to a vehicle that has 'liability only' to save money. In other words, if you have a seventeen year old boy, you probably shouldn't make him the main driver on a 2018 Mercedes. It would behoove you to assign the same male teen to an old truck with no value, thus lowering the 'cost-risk' to the insurance company.

The state and city in which you live also contributes to your cost of insurance. For example, car insurance in a major populated city like New York would be extremely expensive compared to the cost of insurance in a small town like Emporia, Kansas.

So Many Choices! Who's The Best?

Choose which company is best for you!

Choosing an insurance company is difficult. Most people in the United States choose insurance companies based on price. However, most people in the United States do not know how much coverage they should have, and how much they do have. It's important to know what to look for in an insurance company.

First of all, every insurance company in every state must have enough money to pay out claims. If an insurance company does not have the money, the State has to guarantee that money. So, in one sense, 'insurance is insurance' in that all companies have to pay if you are current with your premium.

However, as many people have discovered, there is a lot more to a good insurance company than just price.

First off, you need to find out what kind of coverage you should have. It's best to speak to several different companies to find out what they recommend before you make a decision.

When searching for insurance companies, there are several different websites that will give you multiple bids from multiple companies. Here are some tips to choose the best company for you.

  • Be careful to ensure that all of the bids or quotes you get are 'apples to apples' so you are getting a fair comparison.
  • Look at consumer reviews of any insurance company you are considering
  • Insurance companies are given a rating with 'AM Best' that shows several things, including a company's solvency and customer service rating. Be sure to choose a company with a rating of B+ or better, so you know that if something happens you will have good customer service.
  • Choose between a toll free insurance company (like Geico), or a brick and mortar insurance company that has an office you can actually go to if you'd like. Some people don't care about seeing their agent face-to-face. Toll free companies can save you money because they don't have the expense that brick and mortar companies incur, but you should be sure you are comfortable with speaking to someone different each time you call.
  • Ask about benefits. Some insurance companies have specific benefits for civil servants. For example, many veterans choose USAA because of the benefits they offer. Teachers and policemen may choose California Casualty because of the specific benefits offered to them. Some people like accident forgiveness programs and 'shrinking deductible' programs that reward good driving like Allstate.
  • Decide if it's important to you to have all of your insurance needs in one place. For example, with a company like State Farm you can get get auto, bank, loans, life, home,health and long term care insurance. Other companies like Progressive will broker all extra coverage out to other companies.
  • Find out if the company you are going with has six month premiums or yearly premiums. Companies with 6 month premiums may be more likely to raise your premium more often.
  • Ask about payment plans and discounts for certain payment plans. You don't want to be charged a big fee if you pay monthly.
  • Be sure to ask what their rental car policy is. In the event you need to use a rental car because your car is in the shop due to an accident, it's important that your insurance company directly bills Enterprise or Hertz, or whatever reputable rental car company. If they only 'reimburse' that means you have to pay for the rental car up front, which could run you well over $1000.00.
  • Feel good about who you talk to. Be sure you feel confident. There are too many choices to put up with bad customer service.

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