Bare-bones auto insurance can backfire

All states except New Hampshire require drivers to carry minimum liability auto insurance, which covers the damages they inflict on other drivers and property. Premiums for this coverage cost less than those for extensive policies that cover more. For drivers hoping to cut costs, going with the state minimum might seem like an attractive option.

While many know that driving without insurance can be dangerous and illegal, it's also important to understand what exactly your state's required insurance covers (and what it doesn't) -- and that sacrificing quality coverage could cost you more in the long run.
What exactly does minimum liability auto insurance cover?
Typically, minimum liability coverage is broken into three components:
1. Bodily injury liability per person injured in an accident. 2. Bodily injury for the accident in total. 3. Property damage.
In Arkansas, for instance, the liability limits are $25,000 per person injured, $50,000 per accident and $25,000 property damage. This would be written out in industry shorthand as 25/50/25.
Bodily injury coverage pays for damage suffered by other people injured in an auto accident that you caused. It provides money to pay for medical expenses, loss of income, legal fees and funeral expenses. Property damage covers damage you inflict on storefronts, fences and other cars.
Some states also require that drivers purchase uninsured/underinsured motorist coverage, which covers you if the driver at fault in an accident doesn't have insurance -- or doesn't have enough to cover your injuries or damages to your car.
A few states also require personal injury protection (PIP). This pays for your own medical bills, income loss and other costs stemming from an accident. PIP typically pays about 80 percent of the losses you suffer or a death benefit, according to Edmunds.com.
The risks of buying minimum coverage
According to a 2009 study by the Insurance Research Council, 14 percent of drivers lacked auto insurance in 2007. Based on unemployment rate projections, the council estimated the number of uninsured drivers would increase to more than 16 percent in 2010.
In a tough economy, auto insurance might be the first cut some drivers make. Will opting for your state's minimum required coverage save you money on your insurance? It seems like it should. But, surprisingly, opting for the minimum can put you at risk for a financial catastrophe.
If, for example, you cause bodily injury or property damage that exceeds your coverage, you will have to pay the rest out of pocket. Say you purchased the minimum coverage to drive in Arkansas. Then you cause a motor vehicle collision that leaves one person dead and another hospitalized. You wind up owing $400,000 in bodily injury-related costs. Since your insurance covers only $50,000 per accident, you must pay the balance -- $350,000.
The Insurance Information Institute recommends that most drivers get a minimum of $100,000 for bodily injury per person and $300,000 per accident.
If you want to save, consider these other methods to cut costs:
  • If your vehicle is a clunker, the Insurance Information Institute recommends opting out of collision and comprehensive insurance.
  • Raise your deductible to protect only against catastrophic losses. If you choose a high deductible, set aside money in a special emergency fund.
  • Search for discounts. Insurance companies might offer better rates if you can prove that you're a good student and a safe driver.
  • Pay off your premiums in a lump sum instead of in installments. Some insurance providers offer discounts for doing so.
  • Get your home and auto insurance through the same carrier to get discounts.

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