What Insurance Coverage Should I Have on My Car?
- Many states require certain minimum levels of auto insurance. For example, most states require auto liability insurance, which pays for damages you cause to others as a result of operating a vehicle. If you were to run a red light and hit another car, liability coverage could pay for the damage to the other driver's car and his medical bills. Personal injury protection (PIP) coverage is required in some states, which pays for medical bills and other costs you incur if you get into an accident. Some states also require uninsured and under-insured motorist coverage, which pays for damages caused to you by drivers that do not carry insurance or have inadequate insurance. You should, at the bare minimum, buy enough auto insurance to meet your state's legal requirements.
- Comprehensive coverage is an optional type of insurance that compensates you for damage that results from a variety of perils such as storm damage, hitting wild animals, hail damage, theft, water damage and fire damage. You should carry comprehensive if your car is valuable enough so that you could not afford to replace it with your savings. For example, if your car is worth $20,000, it would probably be too financially burdensome to replace it with your savings. On the other hand, if your car is only worth $2,000, you might prefer to forgo coverage to save money on your insurance and accept the risk of possibly having to replace the car.
- Collision coverage pays for damage your car incurs from driving events like accidents with other cars and stationary objects. Collision coverage is optional, so you can save on insurance by choosing to go without coverage, but you should carry collision coverage if your car is too valuable for you to replace with your own money.
- The minimum liability insurance required by your state may be lower than the damage that could occur in an accident with another driver. For example, many states require $25,000 or less in property damage liability coverage, even though many cars are worth more than $25,000. It can be wise to purchase more than the minimum amount of liability coverage to protect yourself against having to pay for damages you cause in costly accidents. High liability limits are especially important if you have significant personal assets, as it can protect your wealth from lawsuits brought against you by other drivers.
