Determining How Much Car Insurance You Really Need

As the creator of the 1/10th rule for car buying that has saved millions of Americans from financial ruin since 2009, I'm here to tell you about the importance of car insurance.

In order to drive a car in America, you must have car insurance. At the very least, you need you need liability coverage, which covers someone else's damages in case of an accident. The last thing you want to do is get sued and then get taken to the cleaners.

The key is to find the right amount of car insurance that fits your budget and matches your driving habits.

This article explains the different types of car insurance coverages, how much you need, and where you should get car insurance. I personally recommend getting a free quote from Allstate. Drivers can save over $700 on average.

Determining How Much Car Insurance You Really Need

The Different Types Of Car Insurance Coverage

When you go online to check for a free auto insurance quote, you will be asked to choose various options. Before choosing, it helps to know the definitions.

Here is a list of the most common auto insurance coverage with an explanation of what they’re all about.

Liability Coverage

Liability coverage is the minimum amount of auto insurance you need It covers the damages done to other people and property should you cause an accident. It does not cover any damages done to your car or to you or your passengers. There are two parts to liability coverage.

  1. Property damage liability: Your liability coverage will cover the damage done by you to another car, house, store, or any other property
  2. Bodily injury liability: Your liability coverage includes medical bills people involved in the accident, lost wages, and other medical expenses.

Let's say you're texting and driving and hit another car. Your property damage liability will cover the other party’s car repairs as well as any medical bills of people injured in the accident. In most cases, liability coverage will also cover any legal fees.

Most states set a minimum liability coverage limit you need to take out. If you're poor and a good driver, it's probably best to go with the minimum. You'll have to fix all the damage done to yourself and to the car, yourself. If you're rich, then you should get the reasonable maximum and comprehensive coverage, which we'll talk about later.

Uninsured and Underinsured Motorist Coverage

In almost all states, uninsured motorist coverage is mandatory while underinsured coverage being mostly optional. Uninsured motorist coverage covers the costs of the damage that is done to you by uninsured motorists, including bodily injury and property damage.

Underinsured motorist coverage, on the other hand, covers the expenses that are above the insured motorist’s limits. In most cases, if you’re in an accident caused by another motorist, their liability coverage will cover your damage.

Just know that the Insurance Institute estimates that roughly 13% of drivers are completely uninsured. Some of these drivers are too poor to get insured. Some of these drivers are illegally driving on the road.

Comprehensive Coverage

Beyond liability coverage is comprehensive coverage. Comprehensive coverage covers damage to your car that is not the result of an accident including theft, fire, vandalism, falling objects, natural disasters, animals, or riots (civil disturbance). This coverage also has a deductible which you can choose when buying the insurance.

Comprehensive coverage is way more expensive that liability coverage because your are paying insurance two ways. If you are driving a new or more expensive vehicle, you probably will lean towards comprehensive coverage because you want to fix and keep your vehicle.

If you have a junker of a vehicle, if it gets damaged, you're more OK with just throwing it away. I used to drive a 2000 Land Rover Discovery II that I bought in 2005 for $8,000. By the time I sold it in 2014, it was worth $3,000, but had $4,000 in repairs! Having comprehensive coverage would have been a waste of money.

Today, I drive a 2015 Range Rover Sport that costs $80,000 new and probably worth around $45,000. I have comprehensive coverage because it's expensive to fix a Range Rover, and I want to drive it for at least another 5 years. It only has 23,000 miles on it.

Determining How Much Car Insurance You Really Need
My Range Rover Sport 2015

The limit that the insurance will payout is usually the market value of your car. If your car is totaled, you may actually get the full replacement cost of your car new. Make sure to ask your auto insurance provider in case this scenario occurs.

If you like to lease a car, hopefully for a business to get the business deduction, then you will probably need comprehensive coverage. The company leasing you the vehicle doesn't want to be liable for fixing your damages.

Collision Coverage

Collision insurance is a coverage that helps pay to repair or replace your car if it's damaged in an accident with another vehicle or object, such as a fence or a tree. If you're leasing or financing your car, collision coverage is typically required by the lender.

Collision coverage does not cover damage to your vehicle not related to driving (examples: hail or theft), damage to another person's vehicle, medical bills (yours or another person's).

Collision coverage is optional, but if you lease a car or have financing, it most likely will be considered as a requirement. Colission coverage will also have a deductible.

Personal Injury Protection

Personal injury protection, or PIP for short, covers your medical bills should you suffer injury in an accident, as well as cover for income loss, childcare or babysitter, and funeral expenses should the worst happen. PIP coverage does not depend on who caused the accident.

Medical Payments Coverage

Medical payment coverage is an optional add-on to your auto insurance, and it is available in the states that do not offer Personal injury protection.

It covers your and your passengers’ medical bills, whether you caused an accident or not. Unlike PIP, medical payment coverage does not cover lost income or other expenses.

Rental Reimbursement Coverage

Rental reimbursement coverage pays for the cost to rent a car in case of an accident. I opted out of this before, and regretted it because the cost is so cheap. When I had to get my car fixed at the auto body shop, it was out for two weeks. Renting a car at $50 a day for 14 days would have cost $600.

Given I didn't have rental reimbursement coverage, I ended up taking Ubers everywhere. It was convenient, yet it cost more because I had to travel long distances during that time period.

Determining How Much Car Insurance You Really Need
Why you need insurance!

What I Recommend For Car Insurance

Here are several things to consider before getting car insurance:

  • The cost of your car
  • Your driving record – are you a safe or reckless driver?
  • How often you drive your car
  • Do you drive mostly in the city or on the highway
  • Transportation alternatives
  • How common are car thefts and break-ins where you park
  • The size of your cash flow and emergency fund

Depending on how you answer these questions, you can select your car insurance needs appropriately.

Most people just get basic coverage, and alter the coverage amounts and deductibles to find an affordable car insurance premium.

I generally have a $1,000 deductible because I hardly ever get into accidents and have no problems paying $1,000 first before getting coverage. I also like to fix my cars without insurance where I can, because your insurance premiums will go up if you file a claim.

Every situation is different. Some of you might want to get extended coverage.

Extended Coverage

Extended coverage is like an extra layer of protection and includes Medical expenses coverage or PIP, Guaranteed Auto Protection (GAP), and Uninsured (UM) and Underinsured Motorists (UIM) coverage.

If you elected to get extended coverage, know that your monthly car insurance premiums will be even higher. Make sure you cross check what your health insurance will coverage along with what your extended auto insurance will cover. You don't want to pay more than you need to given there may be overlap.

There are other options you can choose for your auto insurance, including: roadside assistance (which I've used plenty of times before when I bought a classic 1989 BMW 635CSI that broke down a lot), rental reimbursement and custom equipment coverage (if you have a highly modified car).

At the very least, everybody needs to have liability coverage insurance.

Bodily Injury Insurance

Bodily injury insurance is tricky because your value depends on the severity of the injury, what you and others do for work, and your net worth.

I recommend at least $100,000 per person and $300,000 per accident. These figures are usually standard when you first take out a basic auto insurance policy.

However, let's say you are a multi-millionaire and cause bodily injury to someone, and that someone hires a lawyer and finds out your wealth. They could easily sue you for way more than the bodily injury insurance amount.

This is where the umbrella policy comes in to protect all your assets that car insurance can no longer provide.

Umbrella Policy

Get At Least The Minimum Car Insurance

The minimum amount of auto insurance required for you to legally operate a vehicle is mandated by your state. Know your state's minimum regulations and follow them.

Chances are you will never get into an accident and never experience bodily harm or death because of a car accident. That said, tens of thousands of people either die or get injured every year from auto accidents in America.

The auto accident rate is climbing because of distracted driving i.e. texting and playing on your phone while driving. It's an epidemic that needs to stop. You can be the safest driver in the world, but some punk on their phone could broadside you and ruin your life because they just had to reply to a text message.

Best Way To Get The Lowest Auto Insurance

The best way to get the lowest and best auto insurance is to search online. Check out Allstate for some of the best plans with the lowest rates around. It’s worth spending a moment filling out a quote to see if you can save some money. Drivers who switch to Allstate can save over $700 on average.

Car insurance is one of the largest ongoing expenses for car owners. When was the last time you compared rates? Allstate lets you save up to 10% when you sign your policy 7 days before it becomes effective and when you pay your policy in full. Find out how much you can save with Allstate today.

You can also get discounts if you have multiple insurance products open with one firm e.g. life insurance, car insurance, personal property insurance, etc.

But the best insurance of all is to drive defensively and slow down. Speed kills. If you can, buy a larger, more modern vehicle with all the safety features as well.

Be safe out there!