Determining Your Auto Insurance Needs
You may have heard advice from budgeting gurus to cut your liability protection and increase your deductibles in order to save money on vehicle insurance. While doing so can substantially lower your premiums, this strategy is far from expedient for most drivers, particularly with regard to the liability portion of your policy. Paltry limits make you vulnerable to costly adverse legal judgments following a traffic incident, even to the point that your assets might be in jeopardy. So how much coverage do you need? Find the answer below.
Meeting the Legal Minimums
First, find out what your state's legal minimums are in terms of insurance. For most people, these skimpy levels are hardly sufficient, but they are a good starting-off point when determining your true needs. Once you have those numbers in mind, think about your income and how much your assets are worth. For example, if you make $30,000 per year, rent a studio apartment, and have no savings or investments, you'll be fine with $50,000/$100,000 of protection. This means that your provider will pay up to $50,000 per person in a crash, not to exceed $100,000 total for one accident.
On the other hand, if you make $75,000 per year, have home equity worth $100,000, a 401k worth $50,000, and savings of $5,000, you would likely need $100,000/$300,000 of coverage at least. Of course, these limits will result in higher costs, but the increase will by no means be large enough to be a financial burden in most cases. Also keep in mind that not losing your home or nest egg in a large judgment against you after an accident is well worth a few extra dollars per month in premiums.
Supplemental Protection to Consider
If you find that your rates become too costly with higher limits, you can pursue alternative sources. Specifically, you might consider covering half of the value of your assets with your vehicle policy then purchasing an umbrella policy to safeguard the remaining value. For instance, you might purchase $300,000 of liability protection on your vehicle plan then supplement your liability with a $1 million umbrella policy. This type of plan will kick in whenever your auto or home coverage limits are reached. These policies are very affordable, and if you need still more insurance, upping your umbrella policy's limit to $2 million or even $3 million won't cost much. In fact, the Insurance Information Institute reports that the difference in premiums between a $1 million and $2 million umbrella plan is an average of just $75 per year. Each additional million after that is about $50 more annually.
Miscellaneous Add-ons that are Important
Policyholders often forget about underinsured/uninsured driver protection, which is also an important coverage to consider. This will pay for the medical costs health plans won't cover in the event you are in an accident with a driver with no or insufficient protection. Try to purchase the same amount of uninsured driver protection that you did for the bodily injury liability of other drivers. That is, if you purchased $100,000/$300,000 of BIL, set your uninsured motorist coverage at the same level for yourself.