How Much Insurance Should You Have on Your Car?

Article by R. Joseph Ritter, Jr. CFP® EA

Many years ago a friend of mine was involved in a three car collision caused by an irresponsible driver. She was the third vehicle, and the at fault driver’s insurance paid in the order of vehicle involved in the crash. The driver’s insurance was exhausted before my friend’s case came up for consideration. The driver only had $15,000 of coverage.

State law minimum insurance coverages may be an affordable option to comply with the law. However, improper insurance planning can be a big drain on your finances, either from claims involving another driver or claims against you.

If you are involved in a crash with a driver who does not have much insurance, your ability to collect is limited. Your only option is to sue the driver for damages, however, a driver who is carrying state law minimums is not likely to be collectible.

If you are at fault for a crash and have only state law minimums, that means you are exposed to liability. Having to defend a lawsuit can be very expensive and time-consuming. If the case results in a judgment, your state may be able to suspend or revoke your driver license if you don’t pay.

For your protection against other drivers, there is coverage known as uninsured motorist and underinsured motorist. Uninsured motorist coverage is often optional coverage you can buy in your own policy and comes into play if you are involved in a crash where the other driver carries no insurance or fled the scene (hit and run). The coverage pays to the limits you buy, which will not exceed the limits of your primary liability coverage.

Underinsured motorist coverage is when drivers have insurance but in insufficient amounts to pay for the damages. Again, coverage pays to the limits you specify, up to the limit of your liability coverage.

For your primary liability coverage, $100,000/$300,000/$100,000 is the highest you generally want to obtain. Coverage is $100,000 for bodily injury to any one person, $300,000 is for all bodily injury, and $100,000 is for property damage.

If you desire any higher limits, it is usually more cost effective to obtain an umbrella policy. The umbrella policy pays when the limits of your primary auto insurance policy are maxed out, but only pays if the claim is larger than the minimum stated in the umbrella policy. Thus, if your umbrella is originally written assuming your auto policy is $100,000/$300,000/$100,000, and your reduce the auto limits to $50,000/$100,000/$50,000, there will be a gap that the umbrella will not pay. The two policies must be carefully coordinated to make sure there is no gap.

If you are struggling to pay the premium for policy limits of $100,000/$300,000/$100,000, there may be other areas in your policy that can be adjusted to lower the premium.

  • Older vehicles do not need as much collision coverage. Collision pays for repairs to your cars no matter who is at fault, and can be useful in a single vehicle crash. It may not be worth paying high premiums for collision on an older vehicle that you could replace inexpensively. If there is significant damage to your vehicle, the insurance company is likely to total it, and the amount of insurance you will receive, after subtracting the deductible, is often not enough to justify the relatively high premium payment.
  • The same comment applies to comprehensive coverage, which applies to losses from storm damage, burglary, theft and other non-crash related damage.
  • Raise your deductibles. Low deductibles are expensive, and if you have an emergency fund, then you will have no trouble meeting a higher deductible.
  • Speak to your agent and ask for suggestions on how to lower your premium.
  • Shop around. Insurance premiums can vary significantly, and it pays to shop around or periodically ask your agent if you are getting the best possible insurance for the lowest cost. Independent agents have access to a number of different insurers and can give you a better picture of the cost differences.
  • Ask your agent about discounts to make sure you are getting the most discounts your insurer has to offer.

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