Auto insurance is really several different insurance policies rolled into one. While insurance is mandatory for everyone who drives a car, the requirements vary from state to state. Some coverage is required at all times, but others are voluntary. Here are the basics, plus some tips on how to keep your premiums in line without taking on unnecessary risks. 

Bodily Injury Liability

What it is: If you are held liable for a crash, this insurance pays for the injuries or death of other people involved in the crash.

How much to buy: At the minimum, opt for the standard 100/300/100 coverage. This means you get coverage up to $100,000 per person for bodily injury, including death, that you cause to others; $300,000 in bodily injury per accident; and $100,000 in property damage. But remember, this is based on averages. If you have a high net worth, boost your bodily injury coverage to 250/500 to make sure you have cover­age in case of a personal lawsuit. Since injuries from some accidents cost much more than “average,” you should never let state minimums guide your coverage limits.  

Collision/Comprehensive

What it is: Collision covers damage to your car that’s not covered by another driver’s policy. Comprehensive covers theft as well as damage from fire, flood, falling trees, hail, hurricane, or animal strikes.

How much to buy: Coverage is usually limited to the book value of your car—which is defined by your insurance company. Deductibles can run from zero to $1,000. We recommend that you opt for a higher deductible to reduce your premiums. But try to set at least the equivalent of the deductible aside in a savings account. Consider dropping collision and/or comprehensive coverage when the annual premium equals or exceeds 10 percent of your car’s cash value.

Uninsured/Underinsured Motorist

What it is: UM/UIM, as it’s known in insurance circles, stands in for the other guy’s missing or insufficient liability coverage. In fact, one out of every eight drivers may be uninsured, according to the Insurance Research Council. This not only covers if the other driver is at fault, but also hit-and-run incidents. This is key—your own liability insurance might not pay for injuries to you and your passengers if you’re not at fault. Also, without UM/UIM, you’ll have to either pay for your losses or sue the other driver for damages in court, a headache that may reap little reward if the defendant has few assets. That’s a pretty good bet since most people who have no insurance “go naked,” as the industry expression has it, because they can’t afford it. So they likely have little money to pay a judgment in your favor. One or both coverages are mandatory in 20 states, including Illinois, New Jersey, and New York. But even if your state doesn’t require it, this is a wise buy. Nationwide, about one in seven motorists is uninsured, but in some states (Oklahoma, Florida, and Mississippi) it’s more than one in four.

How much to buy: Purchase the same limits here as those on your own liability coverage.
 

Medical Payments or Personal Injury Protection

What it is: Medpay and PIP, as they’re known, pay, within the specified limits, the medical, hospital, and funeral expenses of the insured person, people in the insured vehicle, and pedestrians struck by the insured vehicle. PIP is the basic coverage implemented in no-fault automobile insurance states. These states generally limit the cir­cumstances under which victims can sue for injuries and cover the bodily injury for the insured and the passengers of the car. Twelve no-fault accident states require one or the other of this coverage. In other states, this coverage is optional.

How much to buy: Talk with your insurance agent to determine the right amount for you.