Determining your car insurance policy can be a tricky balancing act. Sticking to the minimum coverage required by law could leave you facing high costs beyond your coverage after a severe accident. On the other hand, piling on coverage you don't need makes your premiums a financial burden. To figure out what coverage you need, consider the legal requirements, your car's value, and your financial situation and outlook.
Auto insurance comes in three basic levels: liability, collision and comprehensive. Liability insurance can cover both vehicle damage and bodily injuries you cause to others in an accident; personal injury protection extends that to cover medical expenses from your injuries and to the other passengers in your car. Collision insurance covers the damage to your car. Comprehensive coverage pays for nonaccident damage to your car, such as a flood or vandalism. Insurers also offer other coverage add-ons, including coverage for noninsured drivers, towing costs and payment for a rental car when your car is damaged.
State laws determine the minimum level of insurance you must buy. Almost all states require you to have a minimum level of liability insurance for both injuries and damage. New Hampshire is the exception to this requirement, but you must be able to demonstrate the financial means to cover accident costs to drive without insurance in this state. Certain states require personal injury protection — also called no-fault coverage — and uninsured motorist coverage. Your state's Department of Motor Vehicles can detail the minimum coverage requirements. If you don't own your car outright, your bank or car dealership usually requires you to have collision and comprehensive coverage as well.
Liability insurance places limits on the amount it covers to the driver of another vehicle, the total cost of injuries to everyone in the other car and the damage to the car. Most states require liability insurance to cover at least $15,000 in injuries to the driver, $30,000 in injuries to all passengers in the car and $10,000 in damage to the vehicle, as of November 2010; certain states have higher minimums. You might need more than the minimum, however: "The Wall Street Journal" recommends having total liability coverage equal to your total assets — your house, car, savings and investments. If your state requires personal injury protection, however, the minimum for that might be sufficient, as your health insurance often covers these costs anyway.
Beyond liability insurance, you should assess the cost versus risk to determine how much additional insurance to purchase. Even if your state doesn't require uninsured motorist coverage, such coverage is usually a low cost for a high level of coverage. Towing coverage might be redundant if you belong to a roadside assistance program. If collision and comprehensive coverage is optional, you should first determine the value of your car either through a dealer or the Kelley Blue Book. If the coverage results in a premium that's more than one-tenth of your car's value, you probably should pass on collision and comprehensive coverage.
Once you determine how much coverage you need, you can adjust your policy to make sure you're getting the best value. If you have comprehensive coverage, for example, boosting your deductible to the highest level you can comfortably pay lowers your premium. If you have multiple cars or own a house, you might save by putting them all under the same insurer. You also can look for discounts for having a good driving history, taking a defensive driving course or maintaining good grades if you're a student.
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