Getting auto coverage is one of the most routine steps in owning a car. But before you secure a policy, you need to figure out how much car insurance to buy in order to protect your finances without overpaying on premiums.
In this guide, we’ll talk about how to calculate your coverage needs based on your location, risk tolerance, vehicle value, and financial situation– helping you find that sweet spot where you’re adequately protected without paying for coverage you don’t need.
Note: These tips should not be considered official insurance guidance. Please consult an insurance professional or broker when making decisions regarding insurance.
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Understanding Car Insurance Requirements
Regardless of your personal situation, the bare minimum coverage you can legally obtain is determined by your state. Nearly every state in the U.S. requires drivers to carry some form of liability insurance, though the specific amounts vary significantly from state to state.
For example, California imposes minimum requirements of 15/30/5, which means drivers must carry at least $15,000 in bodily injury liability per person, $30,000 per accident, and $5,000 for property damage liability. Meanwhile, Maine has much higher minimums at 50/100/25. These requirements represent the absolute floor of coverage– the least amount you can purchase while still driving legally.
However, state minimums are rarely enough to fully protect you in a serious accident. A single hospital stay can easily exceed $15,000, and damaging someone’s luxury vehicle could cost far more than $5,000. When minimum coverage isn’t enough, you’ll be personally responsible for the difference– putting your savings and assets at risk.
Types of Car Insurance Coverage
For first-time car insurance buyers, the question of “how much car insurance do I need” is a bit misleading. Since coverage limits are set by type, getting $100,000 in liability coverage won’t come in handy if your car is wrecked from hitting a deer.
That’s why it’s important to understand the various types of coverage and what they include before deciding on coverage limits. Let’s review the major components of a typical auto insurance policy – skip to the end for a handy chart.
Liability Coverage
This covers bodily injury and property damage you cause to others in a car accident and is required by law in almost every state, aside from New Hampshire. However, how much liability insurance you need to carry varies by state.
But even in cases in which you’re not required to carry insurance, you’re still responsible for covering damages if you’re found at fault. That’s why it’s an important form of protection regardless of where you live.
Liability is typically split into three separate coverage limits:
- Maximum payment for bodily injury per person
- Maximum total payment for bodily injury per accident
- Maximum payment for property damage per accident
Liability insurance doesn’t cover your own vehicle repairs or medical expenses from you or your passengers– it only protects you against claims from others.
Collision Coverage
While liability handles damage you cause to others, collision coverage pays for repairs to your own vehicle after an accident or collision, such as hitting a tree. This coverage is subject to a deductible– the amount you pay out-of-pocket before insurance kicks in. Common deductibles range from $250 to $1,000.
Comprehensive Coverage
Often paired with collision, comprehensive insurance covers non-collision incidents like theft, vandalism, fire, and weather damage. Like collision coverage, comprehensive comes with a deductible.
Personal Injury Protection (PIP)
Available in some states and required in “no-fault” insurance states, personal injury protection (PIP) covers medical expenses for you and your passengers regardless of who caused the accident. It may also cover lost wages and services you might need during recovery.
Uninsured and Underinsured Motorist Coverage (UM/UIM)
This protection comes into play when you’re hit by a driver who either has no insurance or insufficient coverage to pay for your damages. It can cover your medical bills, lost wages, and vehicle repairs when the at-fault driver can’t. Uninsured motorist coverage is also required in many states.
| Coverage Type | What It Covers | Required? |
|---|---|---|
|
Bodily Injury Liability |
Injuries to others when you’re at fault |
Yes, by most states |
|
Property Damage Liability |
Damage to others’ property (vehicles, structures) when you’re at fault |
Yes, by most states |
|
Collision |
Damage to your own car from a collision |
No, by states (but often required by lenders/lessors) |
|
Comprehensive |
Damage to your own car from non-collision events (theft, fire, weather) |
No, by states (but often required by lenders/lessors) |
|
Personal Injury Protection (PIP) |
Your (and passengers’) medical expenses, sometimes lost wages, regardless of fault |
Required in “no-fault” states, optional elsewhere |
|
Uninsured Motorist (UM) |
Your injuries/damages if hit by an uninsured driver |
Required in some states, optional elsewhere |
|
Underinsured Motorist (UIM) |
Your injuries/damages if hit by a driver with insufficient liability limits |
Required in some states, optional elsewhere |
Optional Coverages
In addition to the basic types of insurance coverage, there are a few optional categories that may appeal to specific drivers based on their unique circumstances.
- Roadside assistance: Provides emergency services when your vehicle breaks down, including battery jump-starts, flat tire changes, fuel delivery, lockout assistance, and towing; replaces standalone memberships like AAA
- Gap insurance: Covers the difference between your car’s depreciated value and what you still owe on your loan if your vehicle is totaled
- New car replacement coverage: Instead of paying your totaled car’s depreciated value, this coverage provides a brand-new replacement of the same make and model
- Towing and labor cost coverage: Pays for towing your disabled vehicle to a repair shop and labor performed at the breakdown location; similar to roadside assistance but typically more limited
5 Questions to Figure Out Your Car Insurance Needs
The right amount of coverage for you depends on your specific circumstances. Here are some questions you can ask yourself to help you decide.
1. Where do you live?
As previously mentioned, your auto insurance policy must, at the very least, meet the minimums set by your state. In fact, insurance carriers likely won’t even sell you a policy with less coverage than the minimum limit. But beyond legal requirements, consider local factors that might influence your coverage needs:
- Is your area prone to severe weather events that could damage your vehicle?
- If yes, consider bumping up your comprehensive coverage limits
- What’s the rate of uninsured drivers in your state? (In some states, nearly 30% of drivers are uninsured.)
- If yes, make sure to secure UM/UIM coverage
- Do you live in an urban area with higher accident rates or a rural location with limited medical facilities?
- Adjust your collision and PIP coverage accordingly
A good rule of thumb is to gather information on the risk factors in your area and consider opting for higher limits or specific coverages to combat those risks.
2. How much is your vehicle worth?
The value of your car directly impacts how much collision and comprehensive coverage you need.
For newer or higher-value vehicles, comprehensive and collision coverage is usually worth the investment. However, for older vehicles worth less than a few thousand dollars, you might choose to skip collision and comprehensive entirely and set aside money for potential repairs or replacement instead.
Insurance Tip💡: If your annual premium for comprehensive and collision coverage exceeds 10% of your car’s value, you might reconsider carrying them. Instead, put aside the money into a savings account in case you need to pay for any repairs out of pocket.
3. Is your car financed?
If you have an auto loan or lease, your lender will likely require full coverage (liability, collision, and comprehensive) until the vehicle is paid off. They may even mandate specific coverage limits and maximum deductibles to protect their investment.
Failure to maintain adequate coverage may lead to significant consequences, including force-placed insurance, disablement, or even repossession– depending on the lender,
4. What’s your net worth?
Your personal assets play a crucial role in determining appropriate liability limits. The more you own, the more you stand to lose in a lawsuit following a car accident.
Financial experts advise getting a liability policy that at least covers your net worth. Otherwise, you may be forced to sell your home or investments in order to cover costs. Courts can even garnish wages to recoup damages if you’re found liable for a costly accident.
To calculate your net worth, add up your assets (savings, investment accounts, home equity), then subtract any debt. The number you end up with should be the amount of liability coverage you purchase.
5. How much do you have in savings?
As a general rule, having a bigger emergency fund can help you cut insurance costs in two major ways.
First, it increases the deductible you can comfortably handle. A $1,000 deductible will lower your premiums compared to a $250 deductible, but only choose the higher amount if you could readily pay it without financial strain.
Second, robust savings might allow you to self-insure against smaller risks. For instance, you might opt against rental car coverage if you could easily cover those costs yourself if needed.
How to Balance Cost and Coverage
When it comes to buying insurance, you want to find a policy that fits your budget without falling short on protection. Here are some basic steps to help you strike that balance.
1. Compare quotes from different insurers
Insurance companies use different formulas to calculate risk, so prices can vary dramatically for identical coverage. While it may seem excessive, shopping around every time your policy is set to renew is the best way to avoid overpaying.
Fortunately, you can use comparison tools to make the shopping process easier. Check out Auto Quote Tracker’s free shopping tool to start getting quotes from a variety of carriers.
2. Explore discounts and bundling options
Most insurers offer various discounts that can significantly reduce your premium:
- Multi-policy discounts for bundling auto with home, renters, or life insurance
- Safe driver discounts for maintaining a clean record
- Good student discounts for young drivers
- Low mileage discounts if you don’t drive much
- Vehicle safety feature discounts for cars with advanced safety technology
Don’t assume your insurer automatically applies all eligible discounts– ask specifically what’s available to you and make sure it’s included in your premium.
3. Pad your savings to opt for a higher deductible
Increasing your deductible from $500 to $1,000 might save 15-30% on your collision and comprehensive premiums. Set aside the difference in an emergency fund so you’ll be prepared if you need to file a claim.
Special Considerations
While the guidelines above apply to most drivers, certain situations call for specialized insurance approaches. Let’s look at some common scenarios that might necessitate adjustments to the standard insurance formula.
Young or inexperienced drivers
Adding a teen driver to your policy can double or even triple your premium. In this case, maintaining high liability limits remains crucial, especially as teens have the highest accident involvement rate. In fact, you might even consider an older vehicle with liability-only coverage for your young driver.
Of course, not every young driver is equally high-risk. If you think your teen is an exception, there may be a way to factor that into your premiums. Some insurers offer programs that monitor driving habits and provide discounts for safe behaviors, which can be especially beneficial for proving that a young driver deserves lower rates.
High net-worth individuals
If your assets are especially high ($300-500k), you may max out your insurance carrier’s available liability coverage. In that case, you’ll want to consider an umbrella policy. These relatively affordable policies provide $1 million or more in additional liability protection and often cover situations beyond auto accidents.
Drivers with classic or high-value cars
Standard auto policies may not adequately cover collectible or luxury vehicles. Specialized insurers offer agreed-value policies that guarantee a specific payout if your vehicle is totaled, rather than relying on depreciated values.
Final Thoughts
Finding the right amount of car insurance involves balancing legal requirements, financial protection, and budget constraints. While state minimums keep you legal, they rarely provide adequate protection in serious accidents.
For most drivers, appropriate coverage includes:
- Liability limits that exceed state minimums and protect your assets (typically at least 100/300/50)
- Collision and comprehensive coverage for vehicles worth more than a few thousand dollars
- Uninsured/underinsured motorist coverage matching your liability limits
- Deductibles that align with your available emergency funds
Remember that insurance needs evolve with life changes. Review your coverage types and limits on a regular basis to make sure you’re always adequately protected at a reasonable price.
To track your policy for free, sign up for Auto Quote Tracker. We’ll notify you whenever your rates are set to go up (or down) so you’ll know when to start shopping around.
