Underinsured: How to Know If You Have Enough Car Insurance Coverage

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  • Car insurance provides crucial protection for assets, but some drivers may be uninsured and not know it.
  • Drivers can tell if more coverage is needed by considering whether their policy would pay for likely losses. 
  • Drivers should also consider whether they can afford their policy's deductible. 

Drivers should read this before buying car insurance.

Car insurance is required by law, but many drivers should buy more than the minimum insurance coverage. Otherwise, they might be underinsured.

Being underinsured means a driver doesn't have sufficient insurance coverage in place to transfer all the risk they need to so their assets are protected. A driver who is underinsured could end up having to drain their bank account to pay essential bills in the event something goes wrong with their vehicle.

But, how can drivers tell if they are underinsured? Here are the questions motorists need to ask to make sure they have the right coverage. 

Do you have the right kinds of insurance?

Not having the right kinds of insurance is a common mistake that results in many people being underinsured. That's because states typically require only liability coverage which provides no protection for the policyholder's own vehicle.

Most people need collision coverage to pay for repair bills if they are involved in a crash that's their fault, as well as comprehensive coverage for other things that may go wrong, such as a car being stolen or a tree falling on it.

A motorist who couldn't easily afford to replace their vehicle out-of-pocket and who doesn't have collision and comprehensive coverage is underinsured and should consider buying these added protections ASAP. 

Are your policy limits high enough?

Another key question is how high the policy limits are for different kinds of coverage. Specifically, many people buy only the minimum required liability insurance and that is not usually enough.

Liability insurance pays for losses suffered by accident victims if a policyholder causes a crash to happen. It can cover injuries and property damage. If a driver has too little liability coverage and seriously hurts someone or damages property badly, it's possible that driver could be sued personally and find their own assets at risk.

For example, a driver who has $25,000 per person and $50,000 per accident in liability coverage who seriously injures two people who incur $250,000 in medical bills would be extremely underinsured.  

Drivers should make sure to buy more than the minimum -- enough that they are confident their own assets won't be at risk if the worst happens. Finance expert Dave Ramsey recommends buying $500,000 worth of coverage, and that's a good amount for most people. 

Is your deductible affordable? 

Finally, drivers should consider whether their deductible is affordable. This is the amount paid out of pocket for insurance coverage. A higher deductible means lower premiums so it can be tempting, but drivers without enough savings to cover the deductible would be in a difficult position in the event of an accident. So, motorists who don't want to be underinsured should choose a deductible based on how much they have accessible in savings. 

By asking these three key questions, drivers can determine if they have a sufficient amount of auto insurance coverage or if they would face out-of-pocket losses that would be hard for them to handle in the event of a crash or other issue. Ask these questions ASAP so you can buy more protection before it's too late.

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