State Minimum Auto Insurance Coverage: 4 Reasons You Should NOT Only Carry the Minimum Required Coverage

There’s little doubt that the current troubled economic situation in the United States is having an impact on Main Street. Today, many people are taking a hard look at their expenses for ways to save money on things they paid little attention to in the past. For many, auto insurance is a nebulous platitude that few have a desire to understand and, at mere mention, can cause one’s eyes to glaze over. In light of the recent economic downturn, however, auto insurance is more frequently being reexamined and scrutinized by some policyholders in order to find ways to change coverages and save money. 

It’s best to check with your State’s Motor Vehicle Department for information on insurance requirements for what applies in your situation. In California, the Department of Insurance requires that cars carry a minimum amount of liability coverages; only liability coverages. This means that, if your car had the State minimum requirement for insurance, if there were to be a claim, and you’re at fault, the policy would only pay for a minimum amount of medical bills, property damage reparation or replacement, final expense costs and attorney’s fees to protect you. In California, a minimum coverage policy will only pay up to $15,000, per person, for a bodily injury claim, $30,000 per accident and $5,000 for any property damage. Liability coverage does not pay for you or your passenger’s medical bills or to fix your car. The minimum coverage limits haven’t changed since 1967 (when the average cost of a new house was $26,800). Today, minimum coverages are not much more than a formality and offer very little protection. Often minimum coverages are purchased either to save money or because the buyer isn’t well informed of their choices, or both. Here are 4 reasons why carrying only the minimum required coverage could come back to haunt you:

1.    Insufficient Liability Limits: California is a Tort State, as opposed to a No-Fault State. This means that, in California, if you’re found to be the cause of an accident, you’re responsible financially to a person, or a person’s family that you’ve hurt or killed, or whose car or building you’ve damaged or destroyed. It doesn’t matter if this was done intentionally or not. With minimum liability limits only, your insurance company won’t be able to help much if there’s a significant claim and it’s your fault. If and when that time comes, and you’re coverage limits are exhausted trying to pay a claim, you’ll have to self-insure after that which means paying the remainder of the claim out of pocket. This can involve thousands of dollars for someone’s medical bills, funeral costs, repair or replacement of their cars or homes and hiring your own attorney to defend you if you’re sued.  Ask your financial adviser for consultation on understanding how much liability coverage you’ll need to help protect your assets. 

2.    Medical expenses: Most auto insurers offer some version of medical coverage for private passenger, non-commercial auto policies. Medical pay coverage is not required but it’s a relatively affordable way to provide some coverage if you and / or your passengers are hurt in an accident regardless of who’s at fault. One of my long-term customers was recently involved in a serious wreck where she was at fault, sustained serious injuries and will need surgery and physical therapy. Fortunately she wasn’t killed, and no one else was hurt. Her medical bills will likely be over $100,000 and she has no health insurance. When she purchased her auto policy, she purchased $100,000 in optional medical coverage; this costs her an additional $24 per month and, in her view today, is worth every dime. Check with your individual health provider to determine which insurance is primary.

3.    Comprehensive: Another elective is comprehensive coverage. This typically will pay for theft, vandalism, glass claims and other damages to your car, if it’s your responsibility to take care of and not someone else’s. This coverage will pay a benefit if the claim involves things that don’t involve colliding with something. However, hitting an animal, such as a deer, is usually a comprehensive claim as well.  Depending on the value of your car, comprehensive coverage can save you money in the long run if it makes sense financially. The easiest way is to do the math. Start by getting a general idea of what your car could be worth if you’re selling it to someone else.  Kelly Blue Book, www.kbb.com, is a good resource for this.  If you’re car is worth less than the amount you’re paying in premium for this coverage in a few years, consider dropping it.

4.    Uninsured/Underinsured Motorist Coverage: Not having Uninsured / Underinsured motorist coverage on your car is risky because, despite the DMV’s vigorous attempts to crackdown on cars without insurance, there are still lots of people driving around without even minimum coverages. What that means is that, without this coverage, if you’re hit by someone without insurance or without high enough limits, you’ll have to pay out of pocket for hospital bills, lawyers and everything else. The best choice is to keep the same amount of Uninsured / Underinsured motorist coverage on your car as you do liability limits. Also, check with your insurance company as to how much coverage you’ll get to fix or replace your car if you’re hit by someone with no insurance. Usually it’s significantly lower. 

While not every state requires drivers to purchase liability coverage (New Hampshire and Wisconsin don’t), all states do require some sort of proof of financial responsibility. This makes it necessary for someone to have sufficient assets to pay for any liability that’s caused in an accident. When money is tight, by reducing coverages, you’ll save you money in the short-term but the potential financial risk is huge and the future possibilities can be calamitous. Careful consideration of risk protection should be exercised.