Almost every state requires drivers to have auto insurance coverage But state requirements aren’t the only reason to buy coverage. Your auto policy can protect you in more ways than you might realize.
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Auto insurance falls into the insurance family known as property and casualty (P&C).
The property part of the name means the policy protects your property’s value. In this case, the property is your car.
Casualty refers to the liability protection your policy provides. Your auto policy can pay medical costs for injuries to others. It can also cover damage to the property of others.
In addition, most policies provide medical care options for drivers or passengers injured in an auto accident.
What types of auto insurance coverage do I need?
The McCarran-Ferguson Act of 1945 turned insurance regulation over to the states. The federal government can overturn this legislation. But the current state-governed structure probably won’t change soon.
As a result, each state can make its own insurance rules and set insurance requirements.
However, most policies follow a similar structure from one state to the next. You’ll even find similar policy structures in Canada.
But some states require different minimum coverage limits for certain types of coverage.
For example, California requires at least $15,000 in per person bodily injury liability coverage. By comparison, Maine and Alaska each require a minimum of $50,000 in per person bodily injury liability coverage.
Financial responsibility laws in each state govern liability insurance rules. The state legislature writes these laws, so requirements can change.
Similarly, some states may require a specific type of coverage, whereas a neighboring state may not require the same protection.
For example, some states use MedPay to pay for injuries to the driver, while other states use personal injury protection. And some states don’t require either type of medical coverage.
Required auto insurance coverages
When states or insurers refer to required auto insurance coverage, liability insurance is at the heart of the conversation.
You can divide auto insurance coverage types into 3 categories.
- Bodily injury liability
- Property damage liability
- Uninsured motorist protection (UM)
- Underinsured motorist protection (UIM)
- Uninsured motorist property damage protection (UMPD)
- MedPay or personal injury protection
- Collision coverage
- Comprehensive coverage
- Road service coverage
- Gap insurance
- Rental reimbursement coverage
It is important to note that lenders or leasing companies often require collision and comprehensive coverage. However, state laws do not mandate these coverage types. Instead, these coverages often appear only as a condition of the loan or lease agreement.
Some states also allow buying a surety bond or making a cash deposit with the state rather than purchasing liability insurance. California provides these options, for example. Surety bond and deposit requirements for the state are both $35,000.
For most drivers, a standard auto insurance policy may be a more practical choice. A standard auto insurance policy also reduces your financial risk. Insurance transfers risk from the individual to a group with similar risks.
Bodily injury liability
Most states require bodily injury liability coverage, which pays for injuries caused to others due to an automobile accident.
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We often think of auto insurance as protection for our vehicles. But liability coverage can be an even more valuable coverage.
A loss due to damage to our vehicle is limited to the insured value of the car. But the cost of bodily injury liability can reach much higher levels.
Minimum coverage levels start at $15,000 to $25,000 in per-person coverage in most states. You’ll also find a separate coverage limit for per-accident coverage.
For example, let’s say you live in Arizona. You have the state-minimum coverage levels for bodily injury coverage. Your policy provides $15,000 bodily injury liability insurance per person and $30,000 per accident.
If you have an accident that causes injuries to 3 people in the other vehicle, you may become liable for costs related to their injuries. Now let’s say each person has $15,000 in medical expenses.
Your policy provides $15,000 per person in bodily injury liability coverage. At a glance, $15,000 might seem like enough coverage. However, the policy also caps coverage per accident at $30,000. Because 3 people suffered injuries and medical costs for each is $15,000, you have a $15,000 coverage gap. The total liability to others is $45,000, but your policy will only pay $30,000 in this example.
Liability doesn’t disappear if you don’t have enough coverage to pay for losses caused to others.
Courts can seize assets or place liens against assets to cover unpaid liabilities. Future earnings may be at risk as well.
If your budget allows, buy more than the state minimum for liability insurance coverage. Higher limits provide more protection, and the difference in cost may be less than you expect.
Property damage liability
Bodily injury liability is the largest risk, but property damage liability can be a serious concern as well. In an auto accident, you might damage other vehicles. But your policy covers other types of property damage as well. Damage to signs, guardrails, or lamp posts can be common. In some cases, vehicles can damage buildings or costlier structures.
Property damage liability doesn’t have a per person limit like bodily injury. Instead, you’ll find only a per accident limit. In some states, this limit can be as low as $5,000, but you have the option to choose a higher coverage limit.
In later sections, we’ll detail examples of bodily injury and property damage claims and how coverage applies.
Your auto insurance policy also includes coverage for legal costs related to auto insurance liability. Many times, auto accidents can lead to lawsuits. Win or lose, the cost of your defense and related court expenses can add up quickly.
Legal fees for a personal injury defense lawyer can range from $100 to $500 per hour or more. Without auto insurance coverage, the cost of your defense in a lawsuit can easily reach thousands of dollars. Fortunately, your auto insurance policy provides coverage for legal fees in addition to auto accident liability.
Most auto insurance liability claims do not require a court defense. But if your accident results in a court case, legal fees can begin to pile up quickly.
For example, imagine you caused an accident that resulted in injury to another driver. Your policy provides $50,000 in bodily injury liability protection. Court costs and Legal fees run about $15,000 in this example. If the case results in a judgment for $50,000, your policy can cover both the settlement cost and the cost of legal fees. Coverage for your defense exists outside of your policy limits, which means that your defense cost won’t reduce the amount you have available to cover claims.
This structure means you can’t adjust the amount of coverage you have for legal fees. Instead, you can adjust the amount of liability protection on your auto insurance policy to meet your needs.
Uninsured/underinsured motorist protection
We all know that some drivers do not have auto insurance coverage. But you might be surprised to learn how many drivers on the road are uninsured. In some states, nearly 30% of drivers do not have insurance. The percentages vary state by state, but uninsured drivers are a concern everywhere.
If you are injured or an uninsured driver damages your vehicle, your out-of-pocket costs can be high. Uninsured motorist protection allows your policy to cover expenses if you suffer a loss due to an uninsured driver.
Similarly, underinsured motorist protection provides coverage if you suffer a loss due to a driver who does not have enough insurance. If the damage caused to your vehicle or the cost of your medical care exceeds the other driver’s policy limits, your policy becomes secondary coverage.
In effect, the other driver’s policy pays first. When that policy’s limits are exhausted, your policy and then provides coverage.
Coverage for uninsured or underinsured motorist protection usually follows the same structure as your liability coverage. Typically, you have separate coverage limits for bodily injury and personal property damage.
Some states require uninsured and underinsured motorist protection, while other states make these coverage choices optional.
Auto insurance liability limits explained
When shopping for auto insurance, you’ll see liability limits expressed in a type of shorthand. For example, you may see 100/300/100. This shorthand refers to each liability limit.
In this example, here’s what the numbers mean:
- 100: Your policy offers $100,000 in bodily injury liability per person.
- 300: Your policy also offers $300,000 in bodily injury liability coverage per accident. You may see this limit listed as per occurrence rather than per accident.
- 100: The third number refers to property damage liability coverage on your auto insurance policy. in this case, your policy provides $100,000 in property damage liability protection per accident.
This policy structure is called split limits because each type of liability risk has a separate coverage limit on your policy.
However, some states allow a single limit option in addition to a split limit. For example, Kentucky allows a single limit of $60,000. This single limit applies to the total liability for a single accident. Without this option, Kentucky requires 25/50/25.
New York requires policyholders to carry wrongful death coverage in addition to bodily injury liability.
Minimum coverage levels for wrongful death coverage in NY read as 50/100. These numbers indicate a limit of $50,000 per person and $100,000 per accident or occurrence.
In the table below, notice the difference in the minimum required coverage limits by state. Minimum bodily injury limits can be as low as $15,000 or as high as $50,000. To better protect your family, you may want to choose a limit higher than either of these choices.
Auto insurance liability limits by state for standard auto insurance policies:
|State||Minimum bodily injury per person (in thousands)||Minimum bodily injury per accident (in thousands)||Minimum property damage per accident (in thousands)|
|District of Columbia||25||50||10|
|Florida||Not required||Not required||10|
|New Hampshire (available min. limits)||25||50||25|
Auto insurance coverage requirements can change
The minimum liability coverage limits above are accurate as of April 2020. However, minimum requirements can change if legislators revisit financial responsibility laws.
To get up-to-date insurance requirements for your state, visit your state’s official state insurance website. For example, you can find minimum auto insurance requirements for Florida at Florida’s Highway Safety Portal.
Some states also require medical coverage. For example, Florida requires personal injury protection in addition to property damage liability insurance.
MedPay or PIP
Like liability insurance requirements, state rules vary regarding medical care for you or passengers in your vehicle. However, liability insurance cannot cover medical expenses for you or passengers in your car. Instead, medical coverage is available through your auto insurance policy or your health insurance policy.
Some states require medical coverage on auto insurance policies. Others make coverage optional.
You may also have separate health care coverage. It’s okay to have both health insurance and medical coverage through your auto insurance policy. However, if you have medical coverage on your auto policy, expect your auto policy to play a primary role in your care if you become injured by a vehicle. For injuries not related to an automobile, your existing health insurance can help.
Medical coverage on your auto insurance policy revolves around the idea of fault vs. no-fault.
In a no-fault state, your auto insurance policy provides coverage regardless of who is at fault in the accident.
In a fault state, payment for medical expenses depends on who is at fault. If you were injured and were at fault, your policy provides coverage, subject to your policy limits. If the other driver was at fault, the other driver’s liability insurance pays for your medical expenses.
Personal injury protection (PIP) is offered in no-fault states. For fault states, MedPay is available—but not always required.
Medical payments coverage (MedPay)
MedPay offers more streamlined coverage when compared to personal injury protection. But MedPay can cover a broad range of medical expenses.
For example, MedPay can pay for:
- Doctor visits
- hospital visits
- ambulance or emergency technician costs
- health insurance deductibles or copayments
- Nursing or caretaker expenses
Personal injury protection (PIP)
Personal injury protection can pay for the same medical expenses as MedPay. However, personal injury protection offers some additional benefits.
PIP can also cover:
- Medical expenses related to auto injuries
- lost wages due to missed work following an accident
- Funeral or burial expenses in the event of automotive deaths
- Household services such as lawn care or cleaning services
Some states require PIP. Some states require MedPay. A 3rd group of states makes PIP optional, while a 4th group of states makes MedPay optional.
You may also have the option of making your existing health insurance the primary medical care provider for your auto insurance policy.
As you can see, medical coverage choices can be quite different from one state to the next. When choosing medical coverage options for your policy, study your choices carefully. If you’re injured in an auto accident, the choices you make will govern your care.
Optional auto insurance coverages
Liability coverage is almost always needed. Medical coverage is required sometimes. But another set of coverage types may not be needed at all.
For example, physical damage coverage is optional.
Collision and comprehensive coverage are not required by law in any state. These coverages protect your vehicle itself, so you can choose protection as needed for your situation.
However, lenders usually require collision and comprehensive coverage if you have a balance on your car loan. Similarly, leasing companies mandate collision and comprehensive coverage if you lease a vehicle.
The collision coverage on your auto insurance policy pays to repair damage to your vehicle due to contact with another vehicle. This coverage also protects against damage caused by rollovers or due to contact with a stationary object.
The comprehensive coverage on your auto insurance policy pays for damage due to reasons other than collision. For example, comprehensive auto insurance covers damage due to fire and floods. Your comp coverage also protects against losses due to theft or vandalism.
How much auto insurance do I need?
Each state sets minimum auto insurance requirements for drivers. But these minimum limits may not provide enough protection. For many households, a higher coverage limit may be a better fit.
Bodily injury liability coverage limits
In the table earlier, we saw that a common liability insurance requirement is 25/50/25. However, many insurance agents will tell you these levels are not high enough.
Recent figures from the CDC show average medical costs of $3,362 for people involved in auto accidents. However, this figure only includes people with less severe injuries.
For more severe injuries that require hospitalization, CDC numbers show average medical expenses of $56,674. Remember, medical costs and related costs can be much higher sometimes.
Let’s compare the commonly found limits of 25/50/25 to average medical costs from the CDC.
A policy with 25/50/25 offers $25,000 in bodily injury liability per person. This limit compares well with the average injury cost of $3,362 for injuries that only require outpatient treatment.
But for injuries that require hospitalization, the average injury cost of $56,674 is more than double your limit. After your insurance is exhausted, you may still owe nearly $32,000 in bodily injury liability.
States set the minimum coverage limits, but many states openly state that the minimum limits may not offer enough protection.
For example, the Oklahoma Insurance Department suggests 100/300/100 as a safer coverage level. Many insurance agents also recommend this level for homeowners. If you rent, you may want higher limits as well.
Limits of 100/300/100 offer the following:
- $100,000 in bodily injury liability per person
- $300,000 in bodily injury liability per accident
- $100,000 in property damage liability per accident
Property damage liability limits
Minimum coverage limits for property damage liability vary by state but can be as low as $5,000. This figure sounds low until you compare it to the average auto body repair bill.
The Insurance Institute for Highway Safety (IIHS) reports the average cost of all reported collision claims at just over $4,000.
But what if the damage is above the average amount? The average cost of a new car crossed $40,000 in 2021. $5,000 in coverage barely puts a dent in a $40,000 liability.
Limits of 100/300/100, as recommended by many insurers, provide more than enough coverage to replace an average-priced new car.
Also, consider costlier items that can be damaged in an auto accident. Minor fender benders are more common, but crashes involving buildings or homes happen as well. Purchasing only enough insurance to cover a best-case (low loss) scenario might be optimistic. Insurance protects against large, unexpected losses, so higher coverage limits can make a wise choice.
Although we all want lower insurance premiums, higher coverage limits may be more affordable than you might expect.
Uninsured/underinsured motorist protection limits
Both uninsured and underinsured motorist protection provide coverage for you rather than for other drivers. In some states, the coverage limits you choose for UM or UIM need to match your liability coverage limits.
Higher numbers make sense for UM and UIM because the coverage protects you.
MedPay and PIP limits
Discuss your medical coverage needs with your agent. Your existing health insurance can play a role in how the medical coverage on your auto policy works. This interplay can affect your coverage choices.
For example, if you don’t have health insurance or suspect you might lose your health insurance, it makes sense to choose higher coverage limits for MedPay or PIP.
Auto insurance rules concerning medical coverage can be more dynamic than liability limits. Requirements from 2020 might change in 2021, and they might change again in 2022.
Medical coverage is an area of your auto policy where it pays to review your coverage annually.
Collison / Comp limits
For a standard auto insurance policy, you can’t choose the level of coverage for your vehicle. Instead, auto insurers choose an insured value based on market factors, comparing similar vehicles’ value.
However, some types of vehicles can be difficult to value based on market comparisons. For classic or collectible cars, a different kind of valuation method can apply called agreed value coverage. In this situation, you and the insurer agree to an insured value for your vehicle.
Coverage for business or work use of your vehicle
A personal auto insurance policy only protects against personal risks. This limitation means that your policy can’t offer complete protection in many business-related uses.
Rideshare work for companies like Uber or Lyft has become more prevalent in recent years. But a standard auto insurance policy can’t protect against losses that occur when you have a passenger or are waiting for a rideshare passenger.
Here are the stages of activity for rideshare vehicles:
- Personal use: Your auto insurance policy provides protection.
- Logged into the rideshare app: If you’re logged in as available for paid passengers, you enter a type of limbo regarding coverage. You may not have complete protection from either your insurance provider or the rideshare company. Fortunately, many insurance providers now offer an add-on for auto policies to patch this coverage gap.
- While transporting a paid passenger: The rideshare company should provide insurance through its driver program during this stage. Read the coverage details carefully to be sure you understand how coverage works.
Food or product delivery
Similarly, using your vehicle for food or product delivery can create coverage gaps. If you deliver pizzas or work with one of the newer food service apps, such as DoorDash, discuss your coverage needs with your agent.
A standard auto insurance policy will not cover losses that occur during the commercial use of your vehicle.
Using an umbrella policy to boost coverage limits
Accident costs don’t discriminate based on how much money you have. But some households have more wealth to protect. An umbrella policy can raise your liability coverage limits above the maximum limits offered by your auto insurance policy.
An umbrella policy works by stacking coverage on top of your existing insurance. But you may need higher coverage limits on your auto insurance policy to qualify for the extra protection of an umbrella policy.
For example, many insurers require that you carry 250/500/100 as your auto insurance liability limits to qualify for an umbrella. You may also need to increase the liability coverage amount for your home. Insurers commonly require at least $300,000 in personal liability insurance on your homeowners policy to qualify for an umbrella policy.
The umbrella policy stacks its coverage on top of the limits from these two underlying policies.
If you buy a $1,000,000 umbrella policy and have the coverage limits detailed above, here’s what your new coverage would look like:
- Bodily injury liability coverage (per person): $1.25 million
- Bodily injury liability coverage (per accident): $1.5 million
- Property damage liability coverage (per accident): $1.1 million
- Homeowners or renters personal liability insurance: $1.3 million
Because the underlying policies absorb most of the risk (and claims), an umbrella policy offers an affordable way to protect against large, unexpected losses. If you have more to protect, consider adding an umbrella policy to your coverage.
Choosing the right auto insurance coverage amounts
You may see advice that suggests higher coverage amounts for homeowners. This suggestion sounds reasonable because your home may be at risk if you have a liability that exceeds your coverage limits.
However, this logic doesn’t always work because liability doesn’t go away if you don’t have enough coverage but rent your home. Whether you own your home or rent has no bearing on the loss amount. Accidents can happen to any of us, and the cost of accidents can be unpredictable.
Consider worst-case scenarios when choosing a coverage amount for your auto liability insurance. Many households can cover smaller losses out of pocket or by dipping into savings. Insurance is there to protect us against significant losses that can change our financial situation forever. If you can afford more coverage, then consider higher coverage limits.
To keep auto insurance costs in check, compare auto insurance rates from multiple providers. Often, you can find lower premiums without cutting corners on coverage.