How Much (and What Kind) of Car Insurance Do You Need?

by Jim Thompson | Last Updated: October 14, 2023

Car insurance is a necessary and responsible component of car ownership, but it is among the most complicated and confusing products that we buy. What other high-dollar purchases do you make with the hopes of never having to use it?

Many drivers only consider what the state or the finance company requires when shopping for insurance. However, you should seriously consider the value of all of your personal assets to assess the right amount of coverage for you.

The costs and coverages of auto insurance vary wildly in terms of costs and protections. What’s the difference between “liability” and “full coverage?” What is “no-fault” insurance? This post aims to answer these questions and to give you an idea of whether you have enough.

Let’s start our journey by exploring some of the many types of car insurance coverages available.

Types of Car Insurance

The first type of insurance we will discuss is the one required in all 50 states, liability. Liability insurance is designed to protect the “other guy” if you are found at fault in an accident.

Depending on your state, you may be required to carry “10-25-15” or “30-60-25” liability coverage. But what do these numbers even mean?

Liability insurance only covers the other driver. It offers you no protection against your losses. Some drivers are content just to carry this minimum liability insurance, and, in some instances, it makes sense. Why spend hundreds more a year to insure a car that is only worth a few thousand? On the other hand, if you are not in a position to pay for a new car or repairs to an old one out of pocket, you may want to consider additional coverages.

Another consideration when purchasing liability insurance is if your state minimums are reasonable. Some states only require $5,000 worth of injury or property protection. If you have priced a visit to a hospital or a car repair facility lately, you can see how this might not be much protection. You may want to consider upping your amount of liability coverage. As compelling as these hypothetical situations are, there is an even more critical reason why you should consider raising the limits of your liability policy.

If you are found at fault in a collision, it is your responsibility to reimburse the injured party for ALL of his losses. This is fine if the accident is minor and the state minimum coverages aren’t exceeded. But what if the crash is bad enough that the limits of your liability coverage is exceeded?

In a situation such as this, the injured party can file a suit against any of your personal assets with monetary value to seek relief. Personal assets include things you may not consider, things like:

If you have a large portfolio of assets that are precious to you, insure them by raising the limits of your liability coverage beyond the state required minimums.

Your Bank’s Gonna Want You to Have These

If your car is financed, the bank or finance company will require you to add additional coverages to your policy. This change in coverage is designed more to protect them, but it protects you as well. These “full coverage” insurances include comprehensive and collision.

Collision coverage pays to repair or replace your car after an accident. Coupled with liability insurance, all parties involved in a crash stand to be made whole.

Comprehensive (a.k.a. “other than collision”) coverage pays if your car is stolen or damaged by fire, flood, hail, vandalism, or the like. While everyone hopes nothing like this will happen to them, these things do just the same.

Even if your car is not financed, you may want to consider having these coverages, unless you have a few thousand extra dollars lying around to repair or replace your current vehicle in the event of an at fault accident.

What If the “Other Guy” Gets You?

What if you are not at fault in an accident but the other driver is carrying insufficient insurance or no insurance at all? What if you are the victim of a hit-and-run collision? In these situations, you would do well to add uninsured/underinsured coverage to your policy.

Uninsured/underinsured coverage is exactly what it sounds like—coverage that picks up the slack left by the other driver’s policy. This is great protection to have, especially in states where the minimum liability standards are low.

Keeping Everybody’s Body Safe

Medical costs are an expected expense associated with collisions, even minor ones. There are two coverages designed to protect you from out-of-pocket medical expenses due to an accident.

The first is known as medical payments coverage. This coverage will pay for medical bills incurred by you and your passengers. It will also pay for your medical expenses if you are injured riding in another car or are injured by a vehicle while walking or biking.

The other coverage you may consider is personal injury protection coverage. PIP insurance is also known as “no-fault” insurance as it pays no matter which driver is at fault for the accident. Personal injury protection covers the medical expenses incurred by you and your passengers and additional non-medical costs like lost wages.

These coverages are usually quite reasonable in cost, but you may choose to opt out if your existing health insurance provides you enough protection. Study your health insurance policy carefully to make sure.

Other Coverages and Riders

There are a host of other add-ons your insurance agent is more than happy to offer you. These include things like:

  • Towing and labor coverage—This rider works in much the same way as an auto club membership. It will pay for towing your car if it can’t be driven and for other roadside assistance. Handy if you’re not already a member of AAA.
  • Rental reimbursement coverage—This rider pays for car rental if yours is stolen or is being repaired after an accident. Some policies also pay for taxis or rideshare services. Handy if you don’t own a second car or have an alternate way to work.

Research such options carefully. Make sure that if you buy them that you are protecting your bottom line and not just adding to your agent’s.

What These Coverages Actually Cover

State regulations (and common sense) dictate that insurance policies have coverage limits. Depending on the options you choose, here are some things that most policies WILL cover:

  • Damage to your car because of fire, hail, theft, flood, flying gravel, or hitting an animal (if you have comprehensive coverage).
  • Accidents that happen while you or someone covered by your policy is driving a rental car. Check your policy to be sure, but you can generally skip the overpriced coverage rental companies try to pressure sell you at the counter. Some credit cards have the hidden benefit of covering your deductible in the event of a mishap in your rental car.
  • Accidents that happen while you’re driving in other states and Canada.
  • Attorneys’ fees if you’re sued because of an accident.

No matter what coverages WON’T cover things like:

  • Accidents that happen while you’re using your car for rideshare of delivery purposes.
  • Accidents that happen while you’re driving a car that doesn’t belong to you but you could use regularly, like a company-owned car.
  • Accidents that happen while you’re driving in Mexico, driving for business, or racing.
  • Damages that you caused intentionally.

How Much Should Car Insurance Cost?

All auto insurance premiums are based on acceptable risk to the insurer. Factors that influence your rates include things like:

  • Credit score
  • Gender
  • Age
  • Accident history
  • Type of vehicle
  • Driving record
  • Annual mileage
  • Marital status

This information gives the risk assessors an accurate picture of the customers and allows them to determine who is the most likely to have more claims. The higher risk customers get dinged with higher rates.

Whether you think it’s fair or not, that’s how they do it.

Who Gets the Best Rates?

Naturally, drivers in populations that statistically file the fewest claims get the best rates. These include drivers who:

  • Are married
  • Live in rural areas
  • Are female
  • Are over the age of 25
  • Drive a less expensive, older car
  • Have no at-fault accidents
  • Have few (or, better, NO) tickets
  • Drive a car with a better safety rating
  • Drive fewer miles annually
  • Have a good credit score

Typically, these motorists file fewer claims, therefore, cost the insurance companies less money. Such factors make these drivers eligible for lower premiums.

These characteristics don’t factor straight across the board. Though. Your credit score or marital status don’t rate as high as gender, age, or driving history does.

Ways to Get a Lower Insurance Rate

You can take action to lower your insurance costs. Some are more feasible than others, but all of these will help.

  • Improve your driving record
  • Have fewer accidents
  • Drive fewer miles
  • Get a car with the newest safety features
  • Increase your deductible
  • Take a driver safety course
  • Maintain a higher grade point average
  • Raise your credit score
  • Move to a rural location
  • Lower your coverage limits (be careful with this, though)
  • Renew your policy early and pay it in full or, if you’re really brave
  • Get married

Meet with your agent. He or she will work with you to determine the best course of action to lower your premiums. There may be “hidden discounts” of which you may be unaware.

Always, Always, Always Get Multiple Quotes

Unless you have been in a total media blackout for the past 20 years, you have heard an insurance ad making proclamations like these:

  • “Compare and save!”
  • “Shop and save!”
  • “15 minutes could save you a kazillion”
  • “Our new customers saved TWO kazillion and got more coverage and regrew their hair and saved their marriages and lost an average of 12 pounds and…

On and on and on.

Comparison shopping IS important, but you should know a couple of things. One, it’s going to take you longer than 15 minutes. Two, sometimes the lowest price isn’t the greatest deal. Some companies offer products with the same names used by other companies, but their version offers less actual coverage per dollar of premium. Likewise, some companies offer eye popping low rates that they couple with atrocious customer service. Don’t just shop rate; investigate company reputation as well.

When comparing companies it is best to use a third-party rating service like J.D.Power or AM Best. These companies aren’t out to sell you insurance so you can be sure they are unbiased in their well-researched reviews.

Another great third party comparison provider is Gabi. With Gabi, you enter your company and the coverage you already have. They then compare that information to 40+ insurers to give you a true apples-to-apples list of quotes. This approach has been very popular with their customers.

Do yourself a favor and get your Gabi quote comparison today.