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How to Choose the Right Level of Car Insurance: 4 Factors That Matter

Irrespective of the laws of your state, having car insurance is a good idea as it provides a way of deflecting liability in the event of an accident where you are at fault. 

Posted: 21st December 2022 by
Finance Monthly
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While almost all states in the US have a minimum coverage requirement, drivers have the liberty to choose any level of coverage as long as it is above the state minimum. Different coverage levels come with pros and cons that are important to understand before picking an insurance policy. 

If you are unsure what level of coverage will work best for you, this guide can help you determine that.

Common Types of Coverage Include Liability and Full Coverage

Liability coverage is also referred to as third-party coverage and is the minimum coverage offered by an insurer. This level of coverage only covers damages suffered by a third party, including property damage, lost wages, cost of medical treatment, and non–economic damages. 

The pricing for liability coverage is based on the state’s minimum requirements but can vary from provider to provider.

Full coverage has all the benefits of liability coverage but also covers damages to your car, irrespective of fault. It also offers protection against other perils such as theft, fire, damages resulting from bad weather, etc. However, it does not cover other policyholders’ economic or non-economic damages besides property damage. 

If you want to better understand how the two levels of coverage work, you can check out liability and full coverage explained in this article by Marketwatch.

Choosing Between Liability and Full Coverage

The level of coverage determines the cost of premiums. So, full coverage is significantly more expensive than liability coverage. The difference in the cost of premiums leaves many drivers wondering which option will work for them. 

Here are some factors to consider when determining whether to settle for liability or full coverage.

1 - Cost of Your Car

A car is a major investment for most people, and the last thing you want is to lose your investment through an accident or any other peril. So getting full coverage is a good idea if you have a relatively expensive car. 

If your vehicle is not as expensive, you can consider dropping full coverage and liability coverage instead.

2 - Type of Ownership

Most Americans acquire cars through car financing. Car financing arrangements require borrowers to have full coverage on their vehicles as a way of minimizing their risks. 

So, getting full coverage is unavoidable if you plan to use car financing to buy your dream car.

3 - Age of Your Car

Insurance companies have a limit for car mileage that qualifies for car replacement if it is totaled. 

While it may take quite some years to hit the limit, the best rule of thumb is dropping full coverage if a car is over ten years old or when its value doesn’t warrant getting full coverage. 

4 - Budget

Your budget can also affect the type of coverage you choose for your car. However, it is important to ensure that you only buy a car whose insurance premiums you can afford. 

Otherwise, dropping full coverage on budget grounds can mean getting yourself at risk of more problems should you lose your car in an accident or through another peril.

Other Types of Insurance Coverage

Besides liability and full coverage, another type of car insurance worth paying attention to is personal injury protection coverage (PIP). PIP is a requirement in no-fault states and covers the policyholder’s medical expenses, irrespective of fault. You could also consider carrying PIP coverage even when you live in a fault state to cover you against injuries suffered in an accident wheel you are at fault.

Other types of coverage include collision insurance, uninsured motorist coverage, guaranteed auto protection (GAP) coverage, and roadside assistance. If you are still unsure which option fits you best, it would be a good idea to talk to seek help from an insurance expert. 

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