Is Cheap Car Insurance Worth It In The End?

June 15, 2010

In some cases, cheap car insurance (i.e. bare minimum coverage) may be enough to cover damages to your car if you own an early model vehicle, worth a few thousand dollars. Coverage requirements vary by state, and your state minimum coverage may be ample. Cheap car insurance or bare minimum coverage may also be adequate if you own a used late model vehicle and you rarely use your automobile.

In all other cases, cheap car insurance might not be worth the risk. Heres why: Of all the different types of insurance (auto, home, life, life), individuals with auto insurance face the greatest risk of incurring an insurable loss arising out of their use of cars and trucks. Because cars and trucks travel at high speeds on roads in very close proximity to other vehicles, when collisions occur, there is naturally a great risk of serious property damage or liability.

In general, cheap auto insurance policies cover the bare minimum liability amounts required by each state. It's illegal for auto insurance providers to sell any less than the bare minimum. For example, in Ohio, the state requires all drivers to purchase minimum auto liability coverages in the amount of 12.5/25/7.5. These figures correspond to: $12,500 bodily injury per person in any one accident, $25,000 bodily injury for two or more people in any one accident, and $7,500 for property damage, written as 12.5/25/7.5. Meanwhile in Alaska, the requirements are 50/100/25.

While Alaska's minimum coverage amounts may be suitable, Ohio's requirements pose a serious risk. If you live in the state of Ohio and you are involved in an accident that totals your vehicle, causes multiple injuries that require hospitalization, or damages to someone elses property, 12.5/25/7.5 is hardly enough to cover medical expenses, the value of your car or other damages. Just think, according to the Agency for Healthcare Research and Qualitys Healthcare Cost and Utilization Project 2007, the average hospital stay in the U.S. is 4.3-5.1 days. Average charges range from $21,522-$27,734, depending on region. Because most auto insurance accidents result in costs that exceed minimum auto insurance coverage, all state insurance departments recommend carrying higher coverages than the bare minimum.

Cheap auto insurance is also insufficient in states that follow a tort system. Most cheap auto insurance policies offer bare minimum coverage. Under a tort system, if you are involved in an accident, someone must be found to be the cause or fault of the accident. The person deemed at fault is responsible for all damages. The at-fault person's insurance company will handle the damages up to the insureds coverage amounts. Amounts that are not covered by insurance must be paid out of pocket. Most states follow a tort system. Only twelve states follow a no-fault system, which means if you are involved in an accident, your insurance pays for your damages, and the other persons insurance company pays for his damages. The twelve no fault states are:

    District of Columbia
    New Jersey
    New York
    North Dakota

Whether you live in a no-fault state or a tort state, most auto insurance companies and insurance departments will recommend carrying approximately $100,000 for bodily injury and $300,000 per accident. If it is not already required, most auto insurance providers and insurance departments will also recommend carrying uninsured/underinsured motorists coverage (UM/UIM). In some states, more than 25% of drivers in the road do so without auto insurance. The national average for uninsured drivers is around 16.3%. UM/UIM pays the difference between what your regular coverage pays for and your balance. Be sure to talk your auto insurance provider about how much UM/UIM is enough to cover you in the unfortunate event of an auto accident with an uninsured or underinsured driver.

If you want to save on auto insurance, you dont have to skimp on coverage. What you can do is ask your auto insurance company about discounts that you may qualify for. Most auto insurance companies offer discounts for good drivers, mature drivers, car-pool drivers, multicar households, multipolicy discounts, antitheft devices, and seatbelts and airbags. Some even offer discounts for being a nonsmoker.

Michelle Burton is a published author and contributing editor for Auto Insurance Tips, Trouvé Media, Internet Brands, and Publications International, Ltd.

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