How Much Auto Insurance Do You Need? Here’s what Dave Ramsey thinks

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Driving without auto insurance is not only illegal, but there are serious consequences if you don’t have the coverage you need. Having the right amount of coverage will protect your financial assets. The good news is that the premiums are not that expensive. Here are the types of policies that Dave Ramsey recommends along with the recommended minimum.

Types of car insurance

According to Ramsey, there are three important types of auto insurance to consider: liability, comprehensive coverage, and collision coverage. With all three, drivers will have full coverage. Liability insurance pays for property damage and medical injuries sustained by other people as a result of an accident. Every state requires liability except for New Hampshire and parts of Alaska. According to Ramsey, however, the minimum coverage required by the state is not sufficient. He recommends having total coverage of at least $500,000 which includes liability for property damage and liability for bodily injury.

Comprehensive coverage helps pay to replace or repair your vehicle if it’s stolen or damaged in an incident like fire, storm or other natural disaster. Collision coverage helps pay to replace or repair your vehicle if it is struck by another vehicle or object. Collision covers your vehicle where liability covers other people’s vehicles. Ramsey recommends that drivers get both comprehensive and collision.

Ramsey also recommends looking at uninsured (UM) and underinsured (UIM) motorist coverage, medical payment coverage (MedPay), and personal injury protection (PIP). Some of these may be required depending on the state you live in.

Optional auto insurance coverage

Here are other types of coverage that insurance companies may offer. Below is a list of what Ramsey recommends staying away or getting optional coverage:

  • Guaranteed Automatic Protection (GAP): GAP covers the rest of what you still owe on the loan and the market value of the car if it were to be totaled. Ramsey recommends skipping GAP and buying a used car or paying off the new car as soon as possible.
  • Mechanical failure: Ramsey recommends skipping this coverage and using your emergency fund to pay for emergency auto repairs.
  • Rental refund: If your car is repaired, this covers the cost of your rental car. Ramsey says it’s a good idea to add this to your font.
  • Roadside assistance: If you don’t have something like AAA, Ramsey says it can come in handy if you get stuck.
  • Umbrella insurance: This is an additional layer of coverage that comes into effect once you have reached your liability coverage limits. Coverage is usually $1-5 million. If your net worth is over $500,000, Ramsey says this policy is a must.
  • Glass cover: This will cover the cost of replacing or repairing your windshield. Ramsey says the cost of additional coverage may outweigh the benefits.

Should you choose a high or low deductible?

If you choose a high deductible, your insurance company will lower your premium. On the other hand, with a lower deductible, your premiums will be higher. Ramsey recommends working with an insurance agent to make sure the higher deductible is worth it by performing a break-even analysis.

For example, if you increase your deductible from $500 to $1,000 and that reduces your premium by $50 per year, it will take you 10 years to break even. If this reduces your premium by $150 per year, you will break even in 3 years. It makes a lot more sense.

Getting car insurance is the law and state minimums may not be enough. Ramsey recommends getting the coverage you need, especially if it can protect you from car accidents that exceed your budget.

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