Is Buying Minimum Coverage Auto Insurance a Big Mistake?

Minimum coverage auto insurance refers to the minimum amount of auto insurance a driver must buy in order to avoid violating state law.

Usually, this means it includes only bodily injury and property damage liability coverage, and the limits on this might be pretty low (as little as $10,000 or $20,000 per person or $40,000 or $50,000 per accident).

Some drivers opt to purchase the minimum amount of coverage in order to keep the premiums coming out of their checking account as low as possible. But is doing so a big mistake?

Here's why buying minimum coverage could be a disaster

Only buying minimum auto insurance coverage could be a huge financial disaster. There's a simple reason why that's the case.

Insurance transfers the risk of losses to an auto insurer. A driver who purchases only the required minimum coverage will only transfer the risk of the losses that could come if a claim was made against them for injuries or for property damage after they caused an at-fault crash. And drivers aren't even fully transferring this risk to their insurer, since they are buying only a very small amount of coverage.

There are many other financial risks most people can't afford to take on. For example, the average cost of a new car is over $48,000 and even a used car tops $25,000. Without the right insurance, a driver could be forced to pay any remaining loan balance on a totaled vehicle and pay out of pocket for a new car. That would be a financial disaster.

Even the cost of repairing a car could be several thousand dollars, which is money many people simply don't have sitting around. But, without collision insurance, a driver would have no coverage at all to pay to replace their own car unless another driver happened to damage it.

The bottom line is, there is a reason why many other types of auto insurance coverage -- beyond the minimum -- are offered and purchased by so many motorists. The financial loss that could come from not being covered is simply too great.

Here's what to do instead

Rather than buying the minimum required coverage, motorists should strongly consider getting a comprehensive insurance policy that protects against most or all of the losses they could experience. Generally, this will include:

• At least $250,000 per person and $500,000 per accident in bodily injury liability so that most injury claims will be covered (and perhaps more for those with substantial assets)
• Collision insurance to pay for damage to the policyholder's own car
• Comprehensive insurance to pay for any damages not occurring in a crash
• Gap insurance to pay the difference between the fair market value of a vehicle (which is what insurance pays for a totaled car) and any remaining loan balance

A driver should also consider buying new car replacement coverage (to ensure there's money to buy an equivalent model, since cars depreciate quickly) if their vehicle is new. And rental car reimbursement (to pay for a car to drive when a vehicle is being repaired due to a covered cause) may also be a good investment.

Drivers can consider speaking to an independent insurance agent to find out what coverages are right for them, or they can do the research themselves to make an informed choice about all of the risks they'd like to transfer to an insurer to protect their future financial security.