How much car insurance do I really need?

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In a nutshell...
  • You need to carry property damage insurance to pay for any personal property you may damage in the course of an accident
  • If you have a car with relatively high in value or would cost a great deal to repair, collision insurance may be a good add-on
  • A tort liability state requires that someone is charged with the accident, or declared “at fault”

When shopping for car insurance, you will be bombarded with some choices regarding how much and what types of car insurance coverage to purchase.

Car insurance companies want you to buy as much coverage as possible, so you can expect your agent or company representative to push specific products or coverage amounts.

However, the question is, do you need them? Before you begin to shop for car insurance, it helps to have a clear picture of what you need regarding coverage and options.

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State Minimum Requirements

First, you must be aware of your state’s minimum requirements for car insurance. If you travel a great deal or work in a neighboring country, it also pays to know about car insurance requirements in those places, as well.

States operate under two types of car insurance requirements: tort liability and no-fault. Most states have tort law while others offer the driver a choice of which auto insurance laws to fall under.

It is essential that you understand which system your state operates under to purchase the right type of car insurance and make decisions on how much coverage you need.

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No-Fault Car Insurance

If you live in a no-fault state, your choices are relatively simple. In a no-fault state, every person is required to carry enough personal injury protection to cover his or her injuries and those of the passengers in the car.

However, if you cause an accident through an illegal act, such as driving while under the influence or reckless driving, you may be liable even in a no-fault state for damages beyond the PIP coverage.

The limits on your no-fault policy may not be sufficient to meet your medical needs as even though states have minimum required limits of liability insurance these limits are often relatively low.

States with Tort Liability Laws

If you live in a tort liability state, your prospects are a bit different. A tort liability state requires that someone is charged with the accident, or declared “at fault.”

That person’s liability insurance must then bear the costs of all medical bills for injuries caused in the accident. If your liability limits are too low, your insurance coverage may not be enough to cover all the costs, and you can be sued for the difference.

If you have personal property, it can be liquidated to pay for these costs. For this reason, it is essential to be sure that you have adequate coverage to prevent loss of your assets.

A relatively simple way to calculate your insurance needs is to take a general accounting of your assets and see what your net worth is.

You can do this by estimating the value of your home and subtracting any outstanding mortgages, adding the value of your car, and adding the value of any other assets, such as retirement accounts or life insurance policies with cash values.

Supplemental Car Insurance Options

When considering optional add-ons for your insurance, some are more necessary than others. For example, it is almost always a good idea to purchase uninsured motorist coverage.

This protects you if you are hit by a motorist with no insurance and no assets to seize to pay for your medical bills and property damage.

Collision insurance is not necessary if the value of your vehicle is meager unless you rely on that car for your transportation and would have no way of repairing it yourself if you damaged it.

Similarly, comprehensive insurance, which pays for your damages if your car is stolen or damaged from weather, may not be a good investment if your car is particularly old.

It is always a good idea to set your deductibles as high as you can manage but remember that in the event of an accident you should have money in a savings account ready to pay immediately if you must claim on your insurance.

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