How Much Car Insurance Is Necessary?

How Much Car Insurance Is Necessary? article image.

When it comes to car insurance coverage, there's no single right answer for how much you need. The right amount for you depends on a number of factors, including where you live, whether you finance or own your vehicle, what you can afford, what level of coverage you want and how much risk you can tolerate.

As you consider your preferences and your budget, here's what to know about car insurance and how to choose the right level of coverage.

Types of Car Insurance Coverage

When it comes to damage to your car and other property, there are several things that can go wrong—these are called "perils" in insurance lingo. Because there are so many perils, there's no single type of car insurance that covers everything. Instead, there are several types of coverage that provide protection for specific things. Here are the most common ones:

  • Liability coverage: Liability protection has two elements: bodily injury protection and property damage protection. In other words, if you cause an accident or damage someone's property while driving, this helps cover the cost of the injuries or damage.
  • Collision coverage: If you're involved in an accident with another vehicle or hit an object, such as a fence or pole, this can help cover some or all of the damage.
  • Comprehensive coverage: If your car (or property inside it) is stolen or is damaged by hail, fire or vandalism, this protection can help pay to repair or replace the vehicle.
  • Uninsured and underinsured motorist coverage: If a driver who either doesn't have car insurance or doesn't have enough coverage causes an accident, this protection can help pay your medical bills and even repairs to your vehicle in some states.
  • Medical payments coverage: If anyone in your vehicle is injured, this coverage may help pay for medical costs associated with the injury. In some states, this coverage may be called personal injury protection (PIP) instead. Both are similar, but PIP may also cover other things such as lost income, childcare expenses and more.
  • GAP insurance: Guaranteed asset protection (GAP) insurance may or may not be part of your auto insurance policy. GAP kicks in if your car is totaled and you owe more than what your auto insurance company will pay out for the damage.
  • Other coverage types: Depending on your auto insurer, you may have the option to add other types of coverage, such as rental reimbursement coverage if you need a rental car while your vehicle is being repaired, towing and labor cost coverage, ride-hailing coverage if you drive for Uber or Lyft, and more.

How to Choose Your Auto Insurance Coverage

There are some types of coverage you may be required to purchase. For example, most states require some liability insurance; New Hampshire is the only state that doesn't, but you'll need to show proof of financial responsibility if you're ever in an accident.

Some states also require a minimum amount of uninsured and underinsured motorist coverage and medical payments or PIP coverage.

If you're financing your car via a loan or lease, your lender may require certain types of coverage, commonly collision and comprehensive coverage.

With other coverage types, though, and exactly how much you get with the required ones, there are a few things to consider to determine the right level of coverage.

  • State and lender minimums: Depending on where you live and your lender, you may need to have at least a minimum amount of liability, collision and comprehensive coverage. Check with your state and lender to find out what's required.
  • Age of the car: If you're driving an older car, it may simply not be worth enough to get certain types of insurance coverage on it—or at least not the same level of coverage as would be recommended for a new car.
  • Your budget: In an ideal world, you wouldn't have to trade-off coverage for a lower premium. But if you're on a budget, you may need to have less coverage than you want. Take a look at how much you can afford and then work with your insurance agent to determine how much coverage you can get.
  • Your savings: If you have a sizable emergency fund, you may not need as much coverage as someone who only has a little saved up. In this scenario, you can effectively self-insure if something happens to your car, so you choose a lower coverage amount and or a higher deductible to save on monthly premiums.
  • Deductible: With many types of auto insurance coverage, you have to pay a deductible before the insurance protection kicks in. For example, if you have $5,000 in collision damage and your deductible is $500, you pay the $500 upfront, and the insurance company covers the rest. The higher your deductible, the lower your monthly premium. But make sure you can afford to pay more out of pocket in the case of an accident before you go with a higher deductible.
  • Peace of mind: The idea of getting slapped with unexpected car repairs can be stressful for some. If you have room in your budget and want to sleep better at night, it could be worth paying for more coverage than what's legally required.

As you consider your situation, think about these different factors to determine what the right fit is for you.

Is a Good Credit Score Needed for Car Insurance?

You don't necessarily need a good credit score to get approved for car insurance. In most states, however, auto insurers can use what's called a credit-based insurance score to determine the cost of your car insurance policy. This practice is banned in California, Hawaii and Massachusetts.

Having a good credit score can help reduce your car insurance rates because studies show that people with better credit tend to file fewer auto insurance claims. That's why insurers might consider your credit score as a factor when deciding what rate to charge you or whether to offer you a policy at all.

Having a low credit score could cause you to leave some money on the table if it means your policy is more expensive than it would be otherwise.

Revisit Your Auto Insurance Often

Your auto insurance needs and the prices insurance companies are willing to offer can change over time, so it's a good idea to revisit your coverage every year or two. As you do, make sure you still have the right level of coverage for your needs and budget.

Also, consider shopping around and comparing quotes from a few insurance companies with what you're paying now. If you can gain some savings or get better coverage for the same price by switching to a different company, it can be worth it.

Also, check your credit score regularly to make sure it's in good shape, which can help you with your auto insurance rates. If your credit score isn't where you want it to be, take steps to improve your credit so you can take advantage of extra savings.