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HOW MUCH CAR INSURANCE DO I NEED?

22 Min Read | Sep 14, 2023

By Ramsey Solutions
Reviewed by Brett Buechner
By Ramsey Solutions
Reviewed by Brett Buechner

When it comes to car insurance, the age-old question is, How much car insurance
do I need? Here's a quick-and-dirty answer: You need $500,000 worth of liability
insurance. That’s the type of auto coverage you’re legally required to have to
drive anywhere. And that’s the bare minimum amount of coverage we recommend for
all drivers—but there’s a lot more to it than that. We’ll talk more about other
kinds of coverage below, but that gives you a rough idea to start!

The next question on your mind is probably, How much should I pay for car
insurance? After all, if you’re looking for the biggest bang for your buck, you
may think, Shouldn’t I go for the cheapest option?

There’s just one problem with going the cheapest route: Saving money isn’t the
only part of buying car insurance. You also have to think about protecting your
finances from the possibility of a 10-car pileup. (Okay, so that’s a little
unlikely, but you get the point: Car accidents can be expensive.) You need
coverage that actually covers you—the kind that protects you from budget-busting
car wrecks.

You can fail that driver’s test 11 times before you get your license, but you
don’t get a lot of second chances when it comes to car insurance. It’s like
wearing pants—you’re either covered or you’re not.

It’s hard to figure out how much auto insurance you need because, let’s face it,
even basic car insurance is confusing. But don’t worry—we’ll show you exactly
what you need. For starters, most drivers should have at least three types of
car insurance: liability, comprehensive and collision.

But before we dig into exactly how much car insurance you need, let’s talk about
why you need car insurance.

WHY DO I NEED CAR INSURANCE?

So, do you have to have car insurance? Yep! Driving around without car insurance
is like skydiving without a parachute—dangerous and stupid. And in the case of
uninsured driving, it’s also illegal. But get this: Not everyone on the road has
auto insurance in place. Don’t let that be you. You’ll have some heavy problems
if you’re caught on the road without car insurance. We’ve all got some rebel
inside of us, but this isn’t a rule you want to mess with. (But you can drive
barefoot if that’s your thing!)

Another reason to get car insurance: It protects your money. How else are you
going to cover the costs after your teenager accidentally drives your SUV
through the garage door? (Oops!) Or when your uncle forgets to put your car in
park and it rolls into your neighbor’s brand-new convertible? (Crunch.)

The right kinds and amount of car insurance can really save your financial
skin—with less pain than electrolysis. And in the grand scheme of things, it’s
not that expensive. (I’ll talk more on the average costs later.)

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WHAT KINDS OF CAR INSURANCE DO I NEED?

First, let’s break down a few basic car insurance terms.

* A deductible is what you have to pay before your insurance company will pay
their share.
* A premium is what you pay for your coverage (usually monthly).
* Your coverage limit is the maximum amount your policy will pay for each type
of coverage. If you go over your policy’s limits, you’re responsible for any
remaining costs.

Now, there are a bunch of different types of car insurance. The most important
ones are liability, comprehensive and collision coverage. We call them the big
three of basic car insurance—coverage you can’t afford to go without. If you
have all three, it means you have full coverage.

LIABILITY COVERAGE

Liability insurance covers things like medical or repair costs for other people
if you cause an accident—and we recommend having at least $500,000 worth of
liability. (Sending them a sympathy note is a nice touch too—just sayin’.)

Don't let car insurance costs get you down! Download our checklist for easy ways
to save.

Every U.S. state requires you to have liability coverage except for New
Hampshire and parts of Alaska. But you might be asking, How much auto insurance
do I need? Just know, liability coverage isn’t an option. You’re required to get
at least your state’s minimum liability just to drive legally almost anywhere.

On the other hand, those state minimums aren’t nearly enough to protect you. If
anything, you should be asking, How much liability insurance do I need to be
well covered? Like we said earlier, you should have at least $500,000 worth of
liability coverage that includes both property damage liability and bodily
injury liability.

And if you’ve never taken a close look at your insurance paperwork, you’ll want
to take a minute to find out if your coverage limits are written as split
coverage or single coverage. Most are split coverage, but let’s look closer at
both types and see how each one works with your goal of $500,000 in coverage.

SPLIT COVERAGE LIMITS

Most policies have split coverage limits. If yours is split, it’s usually
written out as three numbers. For example, 25/50/15. Don’t let all the digits
confuse you. We’ll break down what each one means.

The first number is the bodily injury per person limit. (Yeah, these docs get a
little morbid.) If you’re at fault in an accident, the policy in this example
will cover up to $25,000 in medical, legal, funeral or lost wage costs for one
person in the other vehicle—the driver or a passenger.

Of course, it’s possible for multiple injuries to happen in an auto accident.
And now you’re looking at some big bills! That’s where the second number comes
in. It’s the bodily injury per accident limit. This policy will pay up to
$50,000 to help with those costs for multiple people, and you’d be responsible
for the rest out of pocket.

The third number is the property damage per accident limit. It’s the amount your
insurer will pay to replace or repair the other vehicle or property you damaged.
So, this policy would pay for up to $15,000 in property damage.

Doing some quick math, this imaginary liability policy gets you a total of
$65,000 in liability coverage. You might think that sounds like plenty, but
trust us, the cost of an accident can escalate quickly! To hit our recommended
$500,000 in liability coverage, you’ll need a split coverage policy of
100/400/100.

In case you were wondering: Leftover money from one category of coverage doesn’t
work like the leftover meatloaf you saved from last night’s dinner for today’s
lunch. In other words, it can’t be used to cover costs in another category. The
costs are defined, and the limits are, well, limited.

But there’s another, more flexible way to write your policy.

SINGLE COVERAGE LIMITS

You can also pick a single coverage limit for liability (aka a combined coverage
limit). Instead of defining three types of liability coverage and giving them
separate limits, a single coverage policy just has one number to cover any
liability costs for an accident—property damage or injuries. Convenient, right?

This type of limit is a lot more flexible, so we recommend asking your insurance
agent to help you get this kind. Again, it’s worth it to get a cool half-million
in coverage.

Whichever type of coverage limit you choose, here’s the bottom line: You need to
at least hit that half-million mark. That way, if an accident’s your fault,
you’ve got a good amount of coverage for costs related to repairing the other
driver’s car (property damage) and any costs related to their lost wages or
medical bills (bodily injury).

Without liability insurance, you’d have to pay for these things out of pocket.
Yeah, let’s try to avoid that

COMPREHENSIVE COVERAGE

Comprehensive coverage protects you from things like theft or damage from a
fire, a storm, a natural disaster, or even a piano falling on your car. (Hey,
haven’t you heard of a rooftop concert?) Comprehensive will pay to replace or
repair your car as long as the damage isn’t due to a collision.

Although comprehensive coverage isn’t legally required unless you have a loan or
lease (and why would you have those?), you should still have it to protect your
finances from life’s flukes. Be sure your deductible is $1,000 or more—that way
you save on premiums because you’ll handle the little issues out of pocket.

COLLISION COVERAGE

Collision insurance covers the cost to repair or replace your car if you’re in
an accident with another vehicle or object. No matter who’s at fault, collision
covers damage to your vehicle—unlike liability coverage, which pays for other
people’s vehicles or medical bills.

Just like comprehensive, it’s not required (again, unless you’re leasing or have
a loan).

So, do you need collision? Here’s what we say: If you can’t replace your car
with cash, you should get collision coverage. Because without it, you’ll be on
the hook to replace your car if it’s totaled. (And to repeat some deductible
advice from above: Go for that $1,000 mark—it’ll save you money on premiums.)
The only time you might not need collision insurance is if your car is paid off
and, again, you can replace it from your savings.

UNINSURED MOTORIST (UM) AND UNDERINSURED MOTORIST (UIM)

Uninsured motorist coverage (UM) covers medical expenses (for you and your
passengers) that result from a hit-and-run accident or a driver who’s uninsured.
But it doesn’t cover damage to your vehicle.1 While some states require you to
have uninsured motorist coverage, UM coverage is worth looking into whether your
state requires it or not. It’s a pretty affordable add-on, and hit-and-runs are
real. You do not want to be left holding the bill for a mess like that.

Then there are times you may get hit by a driver who has insurance, just not
enough. Underinsured motorist insurance (UIM) covers you when you’re in an
accident caused by a driver whose insurance coverage falls below the state’s
required minimums.

And here’s a tip on that note: If you’re not sure about your own state’s
requirements for UM or UIM, reaching out to one of our Endorsed Local Providers
(ELPs) is a great idea. They’re all RamseyTrusted pros who know their stuff and
will have your back for all things car insurance.

Occasionally, you’ll find uninsured motorist property damage, or UMPD, packaged
with UM and UIM. Though it usually has a lower deductible than collision
coverage, you probably don’t need both UMPD and collision coverage since they
essentially do the same thing. But if you drop one of these insurance types,
just be sure you already have the other kind in place first.

MEDICAL PAYMENTS COVERAGE (MEDPAY)

Whether you’re covered by health insurance or not, medical payments coverage
(MedPay) pays reasonable medical expenses for you, your passengers or any family
members involved in a car wreck—no matter who’s at fault. Depending on where you
live, MedPay might be required.

Your health insurance should be enough to cover those costs, so you don’t
necessarily need to get MedPay coverage. On the other hand, it’s usually a very
small premium to get this coverage added to a comprehensive auto policy,
especially if you’re bundling policies with the same company. The extra layer
could come in handy! To find out if you’re good to go already or need to add
MedPay, be sure and review your coverage with one of our RamseyTrusted ELPs.

PERSONAL INJURY PROTECTION (PIP)

Personal injury protection (PIP) is similar to MedPay but has more extensive
coverage, higher coverage limits and a higher premium. But unlike MedPay, PIP
generally has a deductible. (Sidenote: Gladys Knight and the Pips make for super
smooth driving music.)

So far, 19 states have passed laws where you’re either required to have PIP or
have the option to purchase it as an add-on insurance.2 If you live in a state
that requires you to carry PIP, you should take full advantage of the coverage
if you ever need it. Here are some things PIP may cover for you:

* Medical expenses
* Funeral costs
* Physical or occupational therapy
* Substitute services like childcare or lawn care (if your accident left you
unable to take care of your kids or grass)
* Partial lost wages
* Funds to hire subcontractors to complete your work (if you’re self-employed)

Though it varies from state to state, PIP coverage usually kicks in right away
and provides coverage up to the limit you choose. It also has to be used up
before you can tap into your MedPay or health insurance policy.

So you’re probably wondering, Do you recommend PIP? Personal injury protection
is helpful for many situations but not for all. Obviously if you live in a state
where it’s required, you’re going to need it. No matter where you live, PIP
covers so many things at a great value. Here are a couple other scenarios to
consider:

* Anyone who doesn’t have health insurance (a very bad idea, by the way) or has
sucky coverage in that department would be wise to get PIP.
* You might decide to skip PIP if you have really good health insurance that
provides thorough post-accident coverage, but another idea would be to go
with the bare minimum of this coverage type to be super safe and save on
premiums.
* No matter what your situation, asking a trusted insurance pro if you need PIP
is smart.

GET THE CAR INSURANCE YOU ACTUALLY NEED.

With a RamseyTrusted pro in your corner, you’ll get the top-notch insurance
coverage you need without breaking the bank.

Connect with a Pro Today

OPTIONAL CAR INSURANCE COVERAGE

Now that we’ve looked at the main types of car insurance, let’s see what else is
available.

GUARANTEED ASSET PROTECTION (GAP)

With the cost of new and used cars continuing to climb, the average length of a
car loan is about six years, making GAP insurance more popular than ever.3

Let’s pretend you lost your mind and, instead of paying cash, you financed a
brand-new SUV (seriously, don’t do this). If you totaled it a year later, your
insurance company would only cover the actual cash value (ACV) of the SUV. So,
even though they’d be cutting you a pretty big check, it still wouldn’t be
enough to pay off your loan. That’s because new cars lose about 20% of their
value in the first year.4 Yikes!

GAP insurance fills this “gap” by covering the remainder of what you still owe
on your loan.

If you want to save yourself a financial headache, skip GAP insurance and buy a
used car with cash in the first place. If you already have a car loan, make it
your goal to pay it off as quickly as possible so you can drop the GAP coverage
and lower your premium.

TEMPORARY CAR INSURANCE

Temporary car insurance is an option for drivers who plan to drive a car only
for a short period (usually six months or less). So, if you’re going on an epic
road trip with your siblings and plan to drive your brother’s car, temporary car
insurance is helpful. But keep in mind, most reputable insurance companies don’t
offer it. Instead, it comes in the form of non-owner car insurance or rental car
insurance.

MECHANICAL BREAKDOWN

If you’re on a first-name basis with your mechanic, you may be tempted to sign
up for mechanical breakdown insurance because it lets you choose where to get
your car repaired, as long as the mechanic is licensed. My advice? Save your
money and avoid this coverage. If you still want to use your favorite mechanic,
use your emergency fund to pay for emergency repairs—that’s what it’s there for!

RENTAL REIMBURSEMENT

So, how exactly do you make do without a car after an accident? Who’s going to
pick up the kids from school or take you to work the next day? That’s where
rental reimbursement coverage comes in. It covers the cost of a rental car (up
to a specific dollar amount and number of days) while your car is in the shop.

If you think you’ll need this backup plan in place, rental reimbursement’s not a
bad idea to add to your policy—as long as you like the price! But if it’s going
to spike your premium a lot, it’s a no-go. Your emergency fund should be able to
cover a temporary rental (and save you money in the long run).

PAY-PER-MILE COVERAGE

If your car tends to sit in the garage collecting dust, you may need to get out
more. But you may also be interested in pay-per-mile coverage. With this
coverage, your insurer installs a GPS device in your car so you’re billed per
mile rather than with an annual estimate.

ROADSIDE ASSISTANCE

Remember that time you coasted down the interstate on empty, praying you’d make
it to the closest gas station? Or that time you hit a pothole and wound up with
two flat tires? Bad times.

Roadside assistance coverage saves you in these moments. It covers having fuel
brought to you, getting your battery jumped, having your car towed to the
nearest repair shop or replacing a dead battery. And if you don’t have something
like AAA, it can really come in handy.

UMBRELLA INSURANCE

You may be wondering, Why would I purchase an umbrella liability policy if I
already have liability insurance? Umbrella insurance (or personal liability
insurance) is an extra layer of liability coverage that kicks in after you’ve
met the limits of your current policy. You’ll typically find coverage ranging
from $1–5 million.

If your net worth is $500,000 or higher, umbrella insurance is a must to protect
your assets! It also covers any damages you’re legally responsible for in the
event of an accident. Plus, umbrella insurance normally offers a wider form of
protection than liability insurance for things like legal fees, false arrests
and even slander.

CUSTOM EQUIPMENT

Roll bars. Fog lights. Camper shells. (Those could all make for great indie band
names, right?) If upgrading your car is how you roll, you might look into custom
equipment coverage. And if you’ve permanently installed aftermarket parts (not
made by the original manufacturer) or performance parts on your car, adding this
to your car insurance could help you pay to repair or replace enhancements like
custom running boards, stereo systems or even a custom paint job.

ORIGINAL EQUIPMENT MANUFACTURER (OEM) ENDORSEMENT

Original equipment manufacturer (OEM) endorsement is a mouthful, but here’s the
deal—it’s coverage that makes sure the same parts your manufacturer safety
tested and used to originally build your vehicle will be used to fix your car if
it’s in an accident.

Quick note on OEM endorsement: Not all insurance companies offer this kind of
coverage. Be sure to find an agent who’ll explain everything that’s available to
you—and who’ll help you get the right amount of coverage at the best price.

FORGIVENESS COVERAGE (ACCIDENT FORGIVENESS OR MINOR VIOLATION FORGIVENESS)

Did you know just one at-fault accident can significantly increase your
insurance premium? That’s pretty harsh. But forgiveness coverage might help!

Forgiveness coverage can’t turn back time and undo an accident (that’s what time
machines are for). But it can essentially wipe your slate clean by “forgiving”
your first at-fault accident. Depending on your insurance company, this coverage
may only apply once per policy term, or it may take years of safe driving to go
into effect.

GLASS COVERAGE

If you live next to a golf course, you may have found yourself wishing you had
glass coverage to pay for the cost of fixing or replacing the windows on your
car. Some insurance companies offer glass coverage with no deductible, but the
cost of the added coverage may outweigh the benefits, especially since some
policies only cover the windshield.

CLASSIC CAR INSURANCE

Restoring classic cars seems like a cool hobby—but it’s also expensive! That
goes for repairing or replacing them, too. If you’re into cars from the ’90s and
older, you’ll want to look into classic car insurance. This will protect your
investment if that sweet 1967 Volkswagen Beetle gets damaged or stolen.

RIDESHARE INSURANCE

Driving for a rideshare company like Uber or Lyft is a great way to make some
extra cash. But most people doing this kind of work have no idea their personal
policy won’t cover a rideshare hustle. And the rideshare companies don’t offer
full coverage. That’s where rideshare insurance can make up the difference.

SHOULD I CHOOSE A HIGH OR LOW DEDUCTIBLE?

Now that you’re an expert on what kind of car insurance you might need, it’s
time to dig deeper into how to pick the right deductible.

If you choose a high deductible, your insurance company looks at you as a lower
risk and will reward you with a lower premium. If you choose a low deductible,
your insurance company sees you as a higher risk and will—you guessed it—give
you a higher premium. (Spoiler: We recommend the first option.)

A $1,000 deductible usually means you’ll pay a lower premium. And since the
first Baby Step is to save up a $1,000 starter emergency fund, you’ll have the
savings on hand to cover your deductible. But before you sign up for a $1,000
deductible, work with your insurance agent to make sure it’s worth the extra
risk by running a break-even analysis as you compare rates. Let’s take a closer
look.

For example, if you raise your deductible from $500 to $1,000, you increase your
risk by $500. If that reduces your annual premium by $50, you’ll have to go 10
years without an accident to break even—not a great deal. But if increasing your
deductible knocks $150 off your annual premium, you’ll break even in just over
three years. That makes much more sense! Whatever you end up doing, there are
lots of ways to save on car insurance.

And if you’ve heard of something called a disappearing deductible, no, it’s not
a magic trick. Your payments definitely won’t vanish into thin air. Some
insurance companies offer disappearing deductibles at an additional cost for
drivers with a long history of safe driving. The deductible decreases every year
you’re accident-free.

So, let’s say your original deductible is $500 and it decreases by $100 each
year you don’t get in an accident. If you’ve been accident-free for five years,
your deductible would go to $0. But the deductible reappears in full the second
you get into an accident. Ta-da! Factoring in the extra cost of the coverage,
you’re usually better off saving that money to put toward your debt snowball or
emergency fund.

HOW MUCH IS CAR INSURANCE?

You might be thinking, How much does car insurance cost? Well, we’ve got some
numbers for you. The national average cost of car insurance is $1,342 a year for
full coverage or $631 a year for liability.5,6 (That works out to about $112 for
full coverage or $53 for liability car insurance per month.)

But that’s just the average. There’s a ton of factors that impact what you’ll
pay. Here are just a few:

* Type of policy
* Insurance score
* Policy limits and deductibles
* Type of car
* Location
* Age and gender
* Marital and family status
* Driving record
* Credit history
* How much you drive

Also, if your insurance company decides you’re high risk, you can definitely
expect to pay more. But don’t panic. If you stay out of trouble for a little
while, your premiums will eventually come back down to earth.

Another thing that could cause your premium to go up? Constantly filing
claims—even if they’re small. So, if you have $250 worth of work thanks to a
fender bender, you might not want to file that claim. Plus, if you have a $1,000
deductible on a repair that costs $250, it doesn’t make sense to file the claim
because you’ll be footing the bill anyway. Your emergency fund is there for a
reason!

Pick your battles carefully and only file a claim when it makes sense. A good
agent will help you determine if it’s worth filing a claim or not, so be sure to
call yours first.

HOW TO GET CAR INSURANCE

Now that you know everything there is to know about car insurance, the final
question is, How do I get the right car insurance coverage? Whether you’re
purchasing it on your own or using an insurance agent, there are a lot of
factors to keep in mind. You want the most for your money, but you also need to
be covered when you’re on the road. Cost and protection both come into play.

When you’re trying to get the right car insurance at the best price, having the
following key information in mind—and sharing all the facts with your agent—will
help you get the right policies and can even save you some hard-earned money in
the long run!

* If you’re married
* If you use your car for both business and personal use, even if it’s a small
side business
* If you plan to travel out of state frequently
* If you have a teen driver who makes good grades or has completed driver’s
education
* Who you want included on your policy
* If you have a college degree
* If you lease your car or still owe money on it
* If you own a home
* Your occupation and the occupations of others on your policy
* If you are or have been in the military
* If you park your car in a garage
* If you have any anti-theft devices installed in your car
* If you get paperless statements
* If you want any household members excluded from your policy

With so many variables surrounding the types of car insurance available, it’s
easy to spend more money than your coverage is worth. It’s also easy to think
you have enough while actually being underinsured. That’s no good, so look at
your options and get that premium down without sacrificing key protections.

Your goal is to find your car insurance sweet spot. The best way to do that?
Working with a RamseyTrusted insurance agent who’s part of our Endorsed Local
Providers (ELP) program. We trust these insurance pros to look at your unique
situation and find you the best protection at the right price. They can answer
your questions and even run the numbers for you to get you the best deal.

Connect with a trusted pro today!

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About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their
money, build wealth, grow their leadership skills, and enhance their lives
through personal development since 1992. Millions of people have used our
financial advice through 22 books (including 12 national bestsellers) published
by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which
have over 17 million weekly listeners. Learn More.

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