Car Insurance 101: How Much Coverage Do I Need?

The amount of auto coverage you need depends on a miscellany of elements, ranging from your risk profile to the type of vehicle you are driving and whether you own the auto or financed it. It also has to do with people who financially depend on you as well as your own economic condition – precisely, your net worth and the amount of liquid and long-term assets you possess. To figure out what coverage threshold you should purchase, familiarize yourself with the variety of options that make up a standard car insurance portfolio. Things to heed include liability coverage, bodily injury liability, personal injury protection, comprehensive insurance, and underinsured motorist coverage.

What Are the Key Coverage Types?

As a motorist, you should learn more about the various policy types available to you. These include:

  1. Comprehensive – This policy covers expenses if someone steals your car or a non-accident event damages the vehicle.
  1. Personal Injury Protection – With this policy, you get reimbursed for lost wages if you must miss work after an accident. It also pays for the medical expenses of all passengers involved in an accident, including you.
  1. Collision – Here the insurance company covers your car repair costs after an accident.
  1. Underinsured/Uninsured Motorist Coverage – If someone with no or minimal insurance coverage hits you, this policy takes care of costs you incur.
  1. Property Damage Liability – If you cause an accident and damage someone else's vehicle, this vehicle pays for all costs incurred.
  1. Bodily Injury Liability – If you are at fault in an accident, this policy covers the medical costs of people wounded in the crash. Pay attention to the numbers in this policy type to figure out the maximum liability the insurance company is willing to cover. For example, a 30/60 policy means that the insurer will pay up to $30,000 in medical costs incurred by one person injured in a collision you caused, and up to $60,000 in hospital expenses incurred by everyone injured in the crash.
  1. Liability Coverage – If you cause an accident, the insurance company will fork over money to cover expenses and liability, directing the cash to individuals you hit.
Car Insurance 101: How Much Coverage Do I Need?

How Much Auto Insurance Coverage Do I Need?

Now that you understand the various policies that are out there, you should make a decision on what the coverage amount you need. If you drive a financed vehicle, meaning the lender still holds the title, the creditor would require that you get comprehensive and collision, among others. For the lender, the objective is to protect the value of the vehicle, which in this case serves as collateral for the loan. So, decide which policy types you need, that is, one that will give you peace while you are on the road, as well as the respective numerical thresholds – meaning liability maximums – you would be comfortable with if the worse were to happen.

Can an Online Vehicle Insurance Coverage Calculator Help Me?

Yes. Over the last few years, I have used Yahoo! Autos' Auto Insurance Coverage Calculator and found it very resourceful. The tool gives you a "bumper-to-bumper" analysis, walking you through several steps to determine how much you should spend on car insurance.

Take a look at the hypothetical scenario below to understand how granular the tool can be when asking questions about your personal situation, and how detailed it can be when providing the amount of coverage you should consider.

Your information:

  • ZIP code: 10019
  • Model year: 1999 – 2002
  • Original list price: $23,001 – 35,000
  • Is your car owned or financed? Financed
  • Do you rent or own your residence? Rent
  • Are you married? Yes
  • Do you have children that depend on you financially? Yes
  • Total household salary: $100,000 – $150,000
  • Do you have health insurance? Yes, full
  • How much in liquid assets do you have? $25,000 – $50,000
  • How much equity do you have in your car and/or house? $25,000 – $50,000
  • How much do you have in long-term assets, such as 401(k) and IRA? $50,000 – $100,000

Coverage types you might consider:

  • Bodily Injury Liability: $250,000/$500,000
  • Property Damage Liability: $200,000
  • Uninsured Motorist Bodily Injury: $250,000/$500,000
  • Personal Injury Protection: Basic NY Plan
  • Medical Payments: $2,000
  • Collision: $500 deductible
  • Comprehensive: $250 deductible

I suggest you play around with the tool and tweak your data as you wish to get a better idea of the coverage amount and types you need.

Recap

Estimating the type and extent of car insurance coverage you need requires familiarity with policy types and your own situation. Other critical elements include your risk profile, people who rely on you financially, how much in liquid assets you have, and the size of your long-term portfolio.

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