The amount of car insurance you need depends on what you own, what you owe, and what you can afford to lose
There is no single right answer because your situation is different from your neighbor's. A person with a paid-off car and savings can afford to carry less insurance than someone with a car loan and no emergency fund. State minimums exist to protect other people you might hit — not to protect you. Your own coverage should reflect what would actually hurt your finances if something went wrong.
The three main decisions are: how much liability coverage (what you pay if you hurt someone else), how much collision and comprehensive coverage (what you pay if your car is damaged), and whether to carry uninsured motorist protection (what you pay if an uninsured driver hits you). Each one has a real cost and a real consequence if you skip it.
Key Takeaways
- State minimum liability coverage protects the other person in a crash, not you, and is often too low to cover serious injuries or property damage.
- If you have a car loan or lease, your lender will require collision and comprehensive coverage, usually with a deductible of $500 to $1,000.
- Uninsured motorist coverage protects you when someone without insurance hits you, and costs very little compared to the risk.
- Your liability limits should be at least as high as your net worth plus your annual income, because that is what someone can sue you for.
- Once your car is paid off and worth less than $5,000 to $10,000, dropping collision coverage often makes financial sense.
Liability coverage: protecting yourself from lawsuits
Liability coverage pays for injuries and property damage you cause to other people. It is the only coverage that protects your personal assets — your house, your savings, your future wages — if you are sued. State minimums are typically $25,000 to $50,000 per person and $50,000 to $100,000 per accident, depending on where you live. These limits are almost always too low.
A serious injury claim can easily exceed $100,000. A person hospitalized for a week, with surgery and ongoing physical therapy, can rack up $200,000 to $500,000 in medical bills alone. If you are found at fault, the injured person can sue you personally for the difference between what your insurance pays and what their damages actually cost. They can garnish your wages, place a lien on your house, and seize your bank accounts.
A practical rule: carry liability limits equal to your net worth plus your annual income. If you own a house worth $300,000 with a $200,000 mortgage (net worth $100,000) and earn $60,000 a year, you should carry at least $160,000 in liability coverage. Most insurers offer $100,000, $250,000, $300,000, or $500,000 per person. The jump from state minimum to $100,000 or $250,000 costs only $10 to $30 more per month.
Collision and comprehensive: protecting your car
Collision coverage pays to repair or replace your car if you hit something or someone hits you. Comprehensive coverage pays for theft, weather, vandalism, and animal strikes. Together they are called "full coverage," though that term is misleading — they do not cover everything.
If you have a car loan or lease, your lender requires both. They own a stake in the car and will not let you drive it without protection. If you own the car outright, the decision is yours. The question is whether the monthly premium is worth the risk of paying out of pocket to fix or replace the car.
Most collision and comprehensive policies come with a deductible — the amount you pay out of pocket before insurance kicks in. A $500 deductible means you pay $500 and insurance pays the rest. A $1,000 deductible is cheaper per month but costs more when you actually need it. If your car is worth $8,000 and you carry a $1,000 deductible, the insurance company will pay at most $7,000. If the car is totaled, you lose $1,000 of your own money.
Once your car is paid off and worth less than $5,000 to $10,000, dropping collision and comprehensive often makes sense. The monthly premium may be $50 to $100, but the payout if something happens is capped at the car's value minus the deductible. If you have savings to cover a replacement, self-insuring (dropping the coverage and paying out of pocket if needed) can save money over time.
Uninsured and underinsured motorist coverage
Uninsured motorist coverage (UM) pays your medical bills and lost wages if someone without insurance hits you. Underinsured motorist coverage (UIM) covers the gap if the other driver has insurance but not enough to pay for your injuries. Many states require you to carry at least some UM/UIM, though the minimums are often low.
About one in eight drivers nationwide carries no insurance at all. In some states, the number is higher. If an uninsured driver causes a crash, your own collision coverage will pay to fix your car (minus the deductible), but you have no way to recover medical costs unless you have UM coverage. Your health insurance may cover some injuries, but it will not cover lost wages or pain and suffering.
UM/UIM coverage is inexpensive — usually $5 to $15 per month — and protects you against a real risk. Carry limits at least as high as your liability limits. If you carry $250,000 in liability, carry $250,000 in UM/UIM as well.
Medical payments coverage and personal injury protection
Medical payments coverage (MedPay) pays your medical bills and your passengers' medical bills after a crash, regardless of who is at fault. It does not cover lost wages or other damages. Personal injury protection (PIP) is similar but broader — it covers medical bills, lost wages, and sometimes childcare or household help. PIP is required in some states (called "no-fault" states) and optional in others.
MedPay is cheap, usually $5 to $10 per month for $1,000 to $5,000 in coverage. It is worth carrying if your health insurance has a high deductible or if you are concerned about out-of-pocket costs after a crash. PIP is more expensive because it covers lost wages, but it is required in your state if you live in a no-fault state, so you do not have a choice.
How to decide on coverage limits
Start with your state's minimum requirements — you must carry at least that much. Then ask yourself three questions: What would happen if I caused a serious crash and was sued? What would happen if my car was damaged and I had to replace it? What would happen if an uninsured driver hit me?
If you have significant assets (a house, savings, investments), you are a lawsuit target. Carry higher liability limits — at least $250,000 per person. If you have a car loan, you have no choice about collision and comprehensive; your lender requires it. If you own the car outright and it is worth more than $10,000, collision coverage is usually worth the cost. If it is worth less than $5,000, dropping it often makes sense.
Always carry uninsured motorist coverage. The cost is low and the protection is real. If you live in a state where it is optional, do not skip it.
What happens if you carry too little coverage
If you cause a crash and your liability limits are too low, the injured person can sue you personally. A judgment against you can result in wage garnishment, bank account seizure, and a lien on your house. The lawsuit can take years to resolve, and you will need to hire a lawyer to defend yourself — an expense your insurance will not cover.
If your car is damaged and you have no collision coverage, you pay the full repair bill out of pocket. If the car is totaled, you lose the entire value. If you have a loan on the car, you still owe the lender even though the car is gone.
If an uninsured driver hits you and you have no UM coverage, your own collision coverage will fix your car, but you have no way to recover medical costs or lost wages. You would have to sue the other driver personally, which is expensive and often fruitless because they likely have no assets.
Frequently Asked Questions
What if I can't afford higher liability limits?
Start with your state minimum, but prioritize getting to at least $100,000 per person. The cost difference between state minimum and $100,000 is usually $10 to $20 per month. If that is still too much, look for discounts — bundling home and auto insurance, paying in full instead of monthly, or taking a defensive driving course can cut your premium by 10 to 25 percent.
Should I drop collision coverage if my car is old?
If the car is paid off and worth less than $5,000, dropping collision often makes financial sense. Calculate the annual premium cost and multiply by the number of years you plan to keep the car. If that total is close to the car's value, self-insuring is cheaper. If you have a loan, you cannot drop it — the lender requires it.
Do I need uninsured motorist coverage if I have health insurance?
Yes. Health insurance covers medical bills but not lost wages, pain and suffering, or other damages. UM coverage fills that gap. It is also inexpensive — usually $5 to $15 per month — and protects you against a real risk.
What does "full coverage" actually mean?
There is no official definition. Most people use it to mean liability, collision, and comprehensive coverage together. It does not cover everything — gaps like roadside assistance, rental car reimbursement, and glass repair are separate add-ons.
Can I change my coverage limits after a crash?
You can change your coverage at any time, but your insurer will not increase limits retroactively to cover a crash that already happened. Changes take effect on your next renewal date or immediately if you request it in writing before the crash. Do not wait until after an accident to increase coverage.