NEWS & ARTICLES

Some people have too little car insurance. Others have too much.

Do you have too much car insurance? Are you over-insured? Today, we’re explaining how much car insurance you should have.

Do I Have Too Much Car Insurance Coverage?

How Much Car Insurance Do You Need?

There’s no specific number I can give you for how much car insurance you need.

Certain people in certain financial situations would be best suited for the bare minimum car insurance legally required in their state.

Other people in other situations might need $1 million or $10 million of umbrella coverage.

Based on your net worth, aversion to risk, and other factors, you need to choose the right amount of car insurance for your unique needs. Nobody else can decide for you.

How Much Car Insurance Does an Average Driver Have?

Statistics tell us that the average driver files a collision claim once every three years and a comprehensive claim once every 10 years.

Most of these claims are not serious. Serious, high-value claims (like a total loss claim) are rare. Many drivers go their entire lives without making any claim over $5,000, for example.

With that in mind, most drivers have slightly more than the minimum required insurance limits. In most states, insurance limits are set around 25/50/100, which means the policy has:

  • $25,000 of liability coverage per person
  • $50,000 of liability coverage per accident
  • $100,000 of property damage liability coverage

Furthermore, keep in mind that millions of drivers in the United States have no car insurance whatsoever. Nationwide, 1 in 7 drivers does not have insurance. In some states – like Florida – the number of uninsured drivers is closer to 1 in 5. These uninsured drivers bring down the average limits.

What Are the Minimum Insurance Requirements in Your State?

Check your state’s minimum insurance requirements. They’re different in every state. Drivers in two states (New Hampshire and Virginia) do not technically require any car insurance.

All car insurance sold in your state will at least meet your state’s minimum insurance limits.

Depending on your aversion to risk and other factors, you might want to raise your coverage limit beyond your state’s minimum requirements. You might want to double or triple your coverage, for example.

Some states have high coverage limits already. Texas, for example, requires drivers to have a minimum of a 30/60/25 policy with $30,000 of bodily injury liability per person, $60,000 of bodily injury liability per accident, and $25,000 of property damage liability per accident. that’s significantly higher than most other states. If your state already has a high coverage limit, then you might not need to raise your coverage limits significantly.

Other states have low coverage limits. Drivers in Delaware, for example, are required to have a minimum policy of 15/25/10. In states with low coverage limits, drivers may want to raise their coverage limits.

Higher Coverage = Less Risk

Ultimately, your car insurance coverage limits come down to risk. How much risk are you willing to take on?

Are you more risk-averse? Are you willing to spend more money to have less risk? Or are you comfortable with accepting more risk and saving money on premiums each month?

The more insurance coverage you have, the less risk you have. With high insurance coverage limits, you can easily cover even the worst car accidents.

With low car insurance limits, meanwhile, you’re exposing yourself to significant risk. In the rare event that you cause a significant car accident, you might have to declare bankruptcy to cover your liability.

What’s your Net Worth?

Your net worth plays a significant role in your car insurance coverage. Specifically, people with a higher net worth will want more car insurance coverage than people with a lower net worth.

The reason is simple: someone with a higher net worth has more to lose in a lawsuit.

Let’s say you’re looking at your phone and smash into the vehicle in front of you in rush hour traffic. The other driver has serious spinal injuries and extensive vehicle damage. You’re 100% at-fault for the collision and are liable for any damages. The other driver’s insurance company sues you for the medical bills, vehicle damage, pain and suffering, and all other damages. All of these damages total up to more than $125,000.

If you have a net worth of, say, $30,000, then you could just declare bankruptcy. In this situation, the other driver might not even file a lawsuit because it’s not worth it. If you have a net worth of, say, $2 million, then the driver has more incentive to file a lawsuit. The other driver has more to gain from this lawsuit – and you have more to lose.

For this reason, drivers with a higher net worth and more assets may want to extend their coverage limits. Many drivers will also want to add umbrella coverage. Umbrella coverage extends your personal liability coverage much higher than a traditional auto insurance policy. Most insurance companies offer umbrella coverage with coverage limits ranging from $500,000 to $5 million.

Other Things to Consider When Deciding on Car Insurance Coverage

Here are some of the things to think about when deciding on car insurance coverage limits:

Per-Claim Coverage Limits: Each insurance policy has coverage limits. Some policies meet the bare minimum coverage limits required in your state. Other policies exceed these limits. However, even if a policy seems like it has high coverage limits, there may be per-claim coverage limits. Check your policy to make sure you’re getting the exact coverage limit you intended to buy.

No-Fault Versus At-Fault States: 12 states in America are no-fault states. In these states, your auto insurance automatically pays your medical expenses regardless of fault. The other 38 states are at-fault states, which means one driver must legally be declared at fault for the accident even if both drivers were equally responsible. Generally, you’ll want higher coverage limits in at-fault states because one driver is going to be personally liable for any damages.

Risk Factors: Do you live in a risky neighborhood with lots of break-ins or accidents? Do you spend a lot of time driving in rush hour traffic? Do you drive on icy roads in the winter? All of these things can increase your risk of making a claim.

Full Coverage Versus Basic Coverage: Full coverage car insurance includes comprehensive, collision, and liability coverage. Basic coverage, meanwhile, includes just liability coverage. You can save hundreds of dollars per year with basic liability coverage, but you won’t be able to make a claim for collision repairs on your own vehicle or non-accident related damages.

Health Insurance: Do you have good health insurance? If so, then you may be able to drop medical payments coverage from your car insurance policy. It works in a similar way to health insurance, covering your medical expenses after an accident.

Emergency Fund: If the worst-case scenario occurs and you’re involved in a serious accident, do you have sufficient emergency funds to keep you afloat? Do you have an emergency fund to cover lost wages or medical expenses?

Based on all of these factors, you may want to raise or lower your car insurance coverage limits.

Final Word

Car insurance is all about managing risk. Based on how much risk you want to take on, you might buy higher or lower car insurance coverage limits.

We recommend setting your coverage limits based on your aversion to risk, budget, net worth, and other factors.