How much insurance do you need?

Before you go out shopping for food, you check the refrigerator and the store cupboards to see what you already have. Buying more than you need is wasteful. It is the same with auto insurance. You have to look at what you have and decide how much coverage you need. The starting point is your state’s minimum requirements. The “bad” news is you cannot avoid this. Every state in the union has minimum requirements and you face fines and a possible suspension of your driver’s license if you are caught on the road without a valid policy in force.

For a simple state-by-state list, see http://personalinsure.about.com/cs/vehicleratings/a/blautominimum.htm. For example, Ohio has limits of 12.5/25/7.5. The first two numbers refer to personal injuries. So, each injured claimant is entitled to receive a maximum under the policy of $12,500 with no more than $25,000 payable for each accident. If more than two people are injured, or the injuries suffered by one are more serious, you are responsible for paying all the additional amounts of compensation ordered by the courts. The third number is the limit for property damage. At the other end of the scale, Alaska and Maine have minimums of 50/100/25, i.e. four times those in Ohio with somewhat higher premiums payable. Some states also require you to carry uninsured cover so that you have some protection if the other driver is not insured.

You need to draw a breath at this point. Never make any quick assumptions. You could shake your head in wonder at Ohio’s approach. A hospital could burn $12,500 in a day’s treatment for more serious injuries. And only $7,500 for property damage? That’s not going to cover much work in the body shop for an upmarket car. What is the average cost of a new car to replace the one too badly damaged to repair? But that is the wrong approach. First you have to get into a traffic accident. That accident has to be more than a minor fender bender. More importantly, you have to be worth chasing for damages.

Taking those points in order: if you are an older driver that does only a few miles on quiet roads each month, the chances of you being involved in a more serious accident are small. Although someone could come through an intersection on red and hit you, the probability is low. But if you do hundreds of miles on busy roads, the chances of an accident go up. The more likely the accident, the greater the risk that it will involve more serious injuries and greater property damage. Even so, you may still decide to insure at the minimum level only.

If you are driving a second-hand car which has little value, you are a renter and have only a few assets, no insurance company is going to chase you for money you do not have. But if you have a good job, you own your own home with a good equity in it and have savings, you are more likely to find yourself involved in litigation (assuming the accident was in part your fault). The rule is therefore that it is only worth taking out more than the basic minimum insurance cover if you have assets to protect. Then only take out as much as you realistically think you need. Do not assume the worst will happen and do not listen to any insurance agent telling you the worst will always happen. Only take out as much as you think you need.