Sensible Strategies for Selecting Auto Insurance Coverage

An auto insurance quote can provide a mind-numbing set of options -- encompassing lines of coverage, coverage limits, and deductibles. You might be tempted to choose the options with the lowest premiums, but that approach can easily backfire. 

Saving a few bucks today won't feel so rewarding if it costs you thousands later, after all. So, let's get to the question at hand. How do you decide on your auto coverage needs? Read on to find out. 

Your state's requirements 

Before you start shopping for insurance, it helps to know your state's auto insurance requirements. To be clear, your insurer won't sell you a policy that doesn't meet the state minimums. But every carrier is happy to sell you more insurance than you need. And, to make things more confusing, some states require insurers to quote you non-mandated coverages. 

That's why you should know your state's rules -- so you can confidently decline coverages you don't need.

With a handle on what your state requires, you can analyze your needs for the various coverages available, starting with liability.

Setting your auto liability limits 

In almost every state, you must carry some form of liability insurance. If you cause an accident, your liability insurance pays for any resulting damages to someone else's property or person. The tricky part is that liability insurance has limits on what it will pay. And when accident-related damages exceed those limits, you fund the overage out of your pocket. 

According to the National Safety Council, the average economic cost of a disabling car accident is $101,000.¹ That well exceeds most states' minimum liability requirements. 

In New Mexico, for example, you must carry $25,000 in per-person bodily injury, $50,000 in per-accident bodily injury, and $10,000 in property damage liability.² A policy with these limits will pay out, at most, $60,000 per accident. If the total costs are $101,000, you'd be on the hook for the remaining $41,000. 

As those numbers show, there's a good chance you'll need more liability insurance than your state requires. But how much is enough? Your net worth and your driving record can point you to the right answer. 

1. Your net worth. Think of your auto liability insurance as wealth protection. To the extent you are underinsured, your assets are at risk. So, the wealthier you are, the more insurance coverage you need. If your net worth is $300,000, for example, you probably want at least 100/300/100 liability coverage, which gives you: 

• $100,000 in per-person bodily injury

• $300,000 in per-accident bodily insurance

• $100,000 in property damage.

2. Your driving record and needs. How you drive and how often you drive can increase or decrease your liability needs. For example, say you're worth millions but you only drive a car once a year. In that case, your risk is low -- though you'll still need some asset protection. 

On the other hand, if you're worth millions, you drive daily, and you're a speed demon, your risk is much higher. 

If you want more liability than 250/500/100, it often makes sense to add umbrella insurance instead of a larger auto policy. Umbrella insurance provides $1 million or more of coverage, and it kicks in after you exhaust your auto limits. This policy type is generally cost-efficient, but your insurer will enforce minimum liability coverages on your auto and homeowners policies.³

Personal Injury Protection (PIP)

As of 2022, 12 states require PIP insurance. Most of these are no-fault states, where people injured in car accidents pay their own medical expenses.⁴ 

PIP covers medical expenses, lost wages, childcare expenses, and funeral expenses that arise from a car accident. Your PIP coverage protects you and the passengers riding in your car. 

You must carry your state's minimum PIP requirement. You would opt for greater coverage if you have a high deductible on your health insurance, you earn a high income, or you spend a lot on childcare. Think about your potential losses in these areas if a car accident takes you out of commission temporarily. Then set your PIP limit accordingly. 

Note that PIP is not available in all states. If you don't have access to PIP, Medical Payments insurance is the next best thing.

Medical Payments (MedPay) insurance 

MedPay covers a portion of your medical expenses after a car, bike, or pedestrian accident, no matter who is at fault. This coverage also extends to passengers riding in your car. It's like PIP, except that it covers medical expenses only.

In most states, MedPay is optional. There are some good reasons to have this coverage, though: 

1. MedPay has no deductible. This makes it a nice supplement to high-deductible health insurance. If your health insurance has a deductible of $5,000, you can cover that with MedPay coverage for the same amount.

2. MedPay is usually a low-cost add-on to your auto policy. 

3. MedPay can provide financial relief faster than working with an at-fault driver's insurance. In this case, your insurer would pay you and then follow up with the other driver for reimbursement.⁵

Your MedPay limit should at least match your health insurance deductible. You may want more coverage if you often have passengers with you.

Comprehensive and collision deductibles  

Comprehensive and collision coverage work together to pay for damages to your vehicle in different scenarios. If you have an auto loan, your lender will require you to have comprehensive collision coverage. 

If you own the car free and clear, you could decline comprehensive and collision. However, opting out of these coverages only makes sense if your car is worthless.  

Comp and collision deductible. Your comp and collision coverage automatically insures the full market value of your car -- so you don't have to choose a limit. You will choose a deductible, though. 

Higher deductibles have lower premiums. They also lower the value you can get from your policy. Say you hit a deer and cause $750 in damages to your front fender. If your deductible is $1,000, the insurance doesn't help you. If your deductible is $500, you could use the insurance to save $250. 

Lower deductibles have higher premiums, but they can make sense if: 

• You don't keep a lot of cash on hand.

• Your car isn't worth much. You may not want to sink $1,000 into a car that's only worth $2,500.

Uninsured motorist coverage

According to the Insurance Research Council, one in eight drivers is uninsured.⁶ That's 12.5% of the driving population! This is why it's smart to carry uninsured motorist coverage -- even though it's not required in many states. 

Your uninsured motorist coverage levels should align with your liability limits. If you carry 100/300/100 in liability, it makes sense to have the same levels of uninsured motorist coverage.

Note: some insurers add a small deductible to your uninsured motorist property damage. 

Gap insurance 

Gap insurance pays off your outstanding loan or lease balance if your carrier totals your car for less than you owe. Gap insurance is always optional. 

You'll want gap coverage if you've bought a new car with a low down payment. New cars lose 40% of their value in the first five years, which averages out to 8% annually.⁷ It's common that cars can depreciate faster than you pay down your loan balance.

Gap coverage is affordable, often less than $100 a year. At that cost, it's often worth having. Because if someone steals your car (or you wreck it), your gap coverage could save you thousands. 

Don't skimp on insurance 

Generally, your wealth, driving history, and health insurance deductible can guide you to the right coverages and limits.

If the premiums for your desired coverages are too high, then shop around. That's a better approach than taking less coverage than you need. You might even try to trim other areas of spending before you skimp on your auto insurance. The financial risks of being underinsured are simply too high -- well more than what it costs to have appropriate insurance coverage.