The Hidden Cost of Minimum Car Insurance Coverage

When Dropping Coverage Actually Makes Sense

Decreasing your level of protection can actually be a shrewd move for certain drivers. If your vehicle isn’t worth much, and the total cost of comprehensive, collision, and your chosen deductible surpasses what your carrier will likely pay out on a claim, dropping down to liability-only coverage may be the right choice.

“Let’s say your car is worth about $4,000, carries a $1,000 deductible, and costs $900 a year to insure for physical damage; the maximum net insurance benefit may be roughly $3,000 before considering claim timing and rate effects,” explains Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College. “It can also make sense to drop down to liability-only coverage when your car is stored, rarely driven, or replaced by a cheaper vehicle.”^[2]

When a Fender-Bender Becomes a Financial Crisis

But especially if your car’s value exceeds $4,000, this tactic could backfire in a big way. Your liability-only policy may not adequately cover a significant accident involving several motorists, serious vehicle damage, and costly bodily injuries.

Why State Minimums Aren’t Enough

Here’s the major mistake many policyholders make: They assume they’re sufficiently protected by merely carrying the legal minimum coverage necessary in their state. While liability coverage is required in most states, the limit mandated by your state may not be sufficient if you’re responsible for a costly accident that involves medical expenses and property damage. State minimums were often set years ago and don’t adequately reflect the true cost of contemporary vehicles, litigation, or medical care. 

Case in point: In Louisiana, the minimum liability limits are 15/30/25, meaning bodily injury liability pays $15,000 per person and $30,000 per accident for injuries you cause to others, and property damage liability pays $25,000 per accident for property damage you cause.^[5]

“These limits were set in 2010 and have not been raised since. But over that time, medical costs and the price of automobiles have skyrocketed,” says New Orleans-based personal injury lawyer Loyd Bourgeois, who adds that the average new vehicle now costs $50,000, much higher than that $25,000 property damage limit. “The average insurance claim for a bodily injury nationwide is over $28,000.^{[6], [7]} Between an ambulance, ER visit, diagnostic imaging, and follow-up appointments, even a minor injury quickly exceeds the $15,000 limit.”^[8]

And in a multi-vehicle crash with multiple occupants in each car, you could have several injured individuals trying to split that $30,000 max payout for injuries, “which can lead to underpayment of all parties and drawn-out legal battles over how the money is divided,” Bourgeois continues.

Why Rushing to Pay Off Your Car Can Backfire

If you’re financing a vehicle, your lender typically requires carrying collision and comprehensive coverage until the loan is paid off. Some drivers opt to make accelerated payments to get to the loan finish line quickly, enabling them to drop full coverage and save money. 

While paying off a vehicle early can be financially smart, removing physical damage coverage just to decrease premiums can create a dangerous coverage gap.

“For instance, saving $50 per month by dropping collision coverage amounts to $600 annually. If that vehicle is worth $20,000 but later totaled in an at-fault accident, the driver may have saved hundreds but lost tens of thousands,” warns Ruiz.

The Rental Car Bill Nobody Saw Coming

Another area of coverage the cost-conscious take scissors to is rental reimbursement. Removing this from your policy is easy to do and could save between $2 and $15 per month, but ponder the possible drawbacks.^[9] If your car needs repair following an accident, and the fix will run two or more weeks (more common than you think considering continued parts shortages and shop backlogs), you’ll be without wheels for quite a long stretch. An out-of-pocket car rental could set you back $400 to $600 per week.^[10]

Smarter Ways to Lower Your Premium Without Gutting Your Protection

Instead of cutting coverage and taking risky gambles, explore alternative ways to save money:

• Shop around. Get rate quotes for the same coverage limits from several reputable carriers.
• Raise your deductibles. Increase comprehensive and collision deductibles to an amount you can still swing, which will lower your premium.
• Bundle policies. Use the same insurer for your home and auto policies, which should trigger a bundling discount.
• Maintain a good driving record. This should eventually lower your rates.
• Qualify for discounts. You may be eligible for good driver, mileage, telematics, multi-car, student, safety feature, and anti-theft discounts.
• Review the finer details. “Check your annual mileage, garage and address, household drivers, vehicle choice, and payment plan options for accuracy, and update your policy as needed,” Shirshikov recommends.

Ultimately, “the goal should not be to buy the cheapest policy possible,”  suggests Bourgeois. “It should be to remove any coverage you can reasonably afford to self-insure while keeping protection against losses that could seriously damage your finances and your family’s future.”

Frequently Asked Questions