The cost of car ownership is on the rise, and sky-high auto prices aren’t the only reason why. Auto insurance premiums now average nearly $2,700 per year for full coverage, an increase of nearly 50% in just the past three years, according to research from Bankrate.com.
You are legally required to have auto insurance coverage to drive on public roads virtually everywhere in the US. But the cost of this insurance often can be dramatically reduced. Shopping around for coverage can lead to lower premiums…so can increasing your policy deductibles. But the most dramatic way to slash auto insurance bills typically is to shift from full coverage to a liability-only policy that meets your state’s coverage requirements. The cost of obtaining the minimum legally required liability coverage is an average of 70% less than full coverage, according to Bankrate—that’s a massive savings.
But is liability-only coverage prudent? What does full coverage include that liability lacks? Who should consider liability-only coverage?
Bottom Line Personal asked insurance expert Doug Heller what car owners need to know…
What Does Liability Insurance Cover?
Liability car insurance pays for damage to other cars and injuries to other people if you’re at fault for an accident. It also pays for your legal representation if you face litigation as a result of an at-fault accident.
What liability coverage does not cover: Damage to your own car. If another driver is at fault for the accident, that driver’s liability coverage should pay your bills, but if you are at fault and have only liability coverage, the cost of repairing or replacing your own vehicle would come out of your pocket. Note: Even if you have full coverage to cover damages to your car, comprehensive and collision coverages typically have a deductible that the policyholder must pay out of pocket before the coverage kicks in.”
Liability coverage details…
Your state’s minimum required liability coverage is probably insufficient. These minimums vary by state. Examples: Florida requires $10,000 in coverage per accident…while Alaska, Maine and Virginia require at least $25,000 in property damage coverage per accident and at least $50,000 in bodily injury coverage per person and $100,000 per accident.*
Whatever your state’s minimum coverage amounts, they’re likely not high enough to provide true financial protection. The average new car now costs close to $50,000, and hospital bills can add up quickly. If you cause an accident that totals more than one car and causes multiple injuries, your liability could dramatically exceed any state’s minimum liability coverage requirements and you could be sued for the rest. Minimum coverage could be sufficient if you have few assets and low income—attorneys probably won’t consider you worth suing if you don’t have any way to pay a judgement against you. But if you have significant assets or income, it’s worth obtaining liability coverage well in excess of state minimums and/or a separate “umbrella” policy that extends both your auto and homeowners insurance liability protection.
Liability doesn’t necessarily cover injuries to passengers in your own vehicle. Depending upon the terms of your policy and your state of residence, liability coverage may cover these injuries only if the passenger is not a member of your household. Example: If you’re at fault for an accident while driving a carpool of kids to school, an injury sustained by your child may not be covered by your liability insurance…but injuries to the other kids in the carpool likely will be.
Liability might not be the only auto coverage you’re required to obtain. Vehicle owners in some states also are required to obtain personal injury protection (PIP) coverage, which helps pay the policyholder’s own medical bills if he/she is injured in an accident. This is most common in “no fault” states such as Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah, where each driver’s own insurance typically pays his/her injury-related bills regardless of which driver is at fault for the accident.
Also: Vehicle owners in nearly half of the states are required to obtain uninsured/underinsured motorist coverage to help cover the policyholder’s losses if he is involved in an accident that is not his fault and the at-fault driver lacks sufficient liability coverage.
What Does Full Coverage Car Insurance Include?
Full coverage car insurance typically includes the liability coverage described above plus two additional components called collision and comprehensive…
Collision insurance helps cover the cost of repairing damage to your own vehicle if you’re at fault in an accident.
Comprehensive insurance helps cover the cost of repairing damage sustained while you’re not driving, such as from a tree falling on your car, a flood damaging your car or vandalism to your car. Comprehensive also covers theft of the car and a few specific forms of damage incurred while driving, such as damage from hitting a wild animal.
Note: If the cost of repairing damage to your vehicle nears or exceeds the car’s book value, the vehicle likely will be declared totaled, in which case comprehensive or collision coverage would pay your car’s cash value minus your policy’s deductible rather than cover repair costs.
Full coverage car insurance details…
Full coverage car insurance might include uninsured/underinsured motorist coverage, PIP and more…or it might not. There is no official insurance industry definition of “full coverage,” so different insurers might include slightly different protections in these policies, though all policies are likely to include the three core components—liability, collision and comprehensive. Best: When you contact insurers or brokers to request quotes for full coverage car insurance, confirm what is and isn’t included to ensure that you’re comparing apples to apples and getting the coverage you expect.
Full coverage is not legally required…but some car owners are required to obtain it. If you have a car loan or lease, your contract likely requires that you have collision and comprehensive coverage in addition to liability insurance.
Full coverage doesn’t mean you’re fully protected from all auto-related losses. These policies still have deductibles that must be paid out of pocket before the coverage kicks in, plus liability coverage limits, as described above. Full coverage car insurance won’t cover your repair bills if your car breaks down for reasons unrelated to an accident or other covered event. Damage stemming from driving a vehicle off road or racing it often are excluded as well. The typical full-coverage policy doesn’t cover losses related to business use of the vehicle, such as rideshare driving, though insurers sometimes do offer insurance riders that provide business-use coverage for an additional fee. Other exclusions or limits might apply as well.
Making the Full Coverage vs. Liability-Only Decision
If you have a loan or lease on the vehicle, there’s no decision to be made—your loan or lease contract almost certainly requires that you obtain collision and comprehensive insurance in addition to liability coverage.
But if you own a vehicle outright, consider whether full coverage is worth its cost. Rule of thumb: If the combined cost of the comprehensive and collision components of a full coverage policy exceeds 10% of the vehicle’s value, there’s a strong case to be made for choosing liability-only rather than full coverage.
Helpful:An online vehicle valuation tool such as KBB.com/whats-my-car-worth can estimate your car’s current value.
*New Hampshire car owners technically are not required to obtain auto insurance at all, but if they don’t obtain at least $25,000 per person and $50,000 per accident, they must provide proof of their ability to cover such liability by other means.
Bottom Line Personal interviewed Douglas Heller, insurance expert with the Washington, DC–based Consumer Federation of America, an association of nonprofit consumer organizations. ConsumerFed.org
