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A: A common mistake that many people make is to buy too much or two little auto insurance. Knowing how much insurance to buy comes down to making two decisions:
What should my deductible be?
You can often select a deductible between $250 and $1000 per accident. If you are in an accident where you are at-fault, you will have to pay the deductible portion of the repairs. For example, if the accident cost $2500 to repair and your policy had a $250 deductible, you would pay $250 and your insurance company would pay $2250.
The higher your deductible (closer to $1000) the less you pay for your autoinsurance. The lower your deductible, the more you pay.
Setting your deductible should depend on your assessment of your personal risk for injuries and your financial health. If you have a "rainy-day" fund, you could absorb the higher deductible if you are in an accident. However, if cash is always tight you might want to keep a small deductible so that you know you will be able to repair the car if it gets in an accident.
How much liability insurance (bodily and property) should I buy?
The most expensive component of your auto insurance policy is your liability insurance. So, when you select your policy, make sure that you are purchasing the right amount of coverage.
Your liability insurance is intended to protect your worst-case scenario: you cause an auto accident and seriously injure another party or destroy property. So, add up your assets and liabilities (primarily bank accounts, home equity & stocks) and see what they come to. If your coverage is lower than your assets - liabilities, you may want to consider increasing that coverage.
Why? Consider the accident that caused 80,000 in personal injury damage. If your total assets were 80,000 and you only had 20,000 in insurance coverage, you would be required to pay 60,000 (your total assets - your insurance). Make sure that you protect your downside.
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