Choosing Your Car Insurance Limits

The building blocks of any car insurance policy are its types of coverage and insurance payout limits. On this page, we'll focus on payout limits, which are the maximum amount of money your auto insurance company will pay on a claim for each type of coverage.

Understanding Limits

Your auto insurance policy will list each type of coverage limit using two or three numbers. You will see the coverage written in a format like 10/20 or 10/20/10, with each digit expressed in thousands.

  • The first number indicates the maximum amount your insurance provider will pay out for a single individual involved in an accident.
  • The second number is the total amount your insurance carrier will pay out for all passengers involved in the accident.
  • If there is a third number, it represents the total amount the other driver will receive for damages to his or her property.

While a higher coverage limit means your car insurance company will pay out more per accident, it requires a higher monthly premium.

How to Determine Your Coverage Limits

States typically mandate a minimum coverage limit. However, depending on your financial situation, this may not provide sufficient protection. When determining how much auto insurance you need, you should consider the following factors:

  • Your residence.
    • You may need higher coverage limits if you live and drive in a densely populated urban area, where you're more likely to be involved in an accident. Cars parked on the street instead of inside a garage are also at a greater risk for theft and vandalism.
  • The type of vehicle you drive.
    • If you drive a newer vehicle, you need to choose coverage limits high enough to cover repairs or replacement.
  • Your total assets.
    • If you incur damages that exceed the compensation provided by your car insurance company, the other party involved in the accident may hire a lawyer and sue. If you lose the court case, you could be required to sell assets like your home, other vehicles, or investments to cover the other driver's damages.
    • Individuals with a high net worth should increase their liability auto insurance coverage.
  • Drivers included on your policy.
    • Younger and inexperienced drivers are more likely to have accidents. If you have a teen driver, you may consider increasing your coverage limits.
  • Your available finances.
    • You need to be realistic in determining the premium amount you can afford each month. Failure to pay the premium will result in the cancellation of your policy.

A small amount of coverage is better than having no insurance at all. Most insurance experts recommend that you carry the highest coverage limits you can reasonably afford, based on your financial situation.

When to Opt for Lower Limits

The primary purpose of auto insurance is to protect your assets in the event of an accident. If your car is an older model and you do not own other valuable assets (e.g. a house), you may have adequate protection with your state's minimum coverage limits. Lower limits may also be appropriate if you live in an area with a low population density or if you do not drive on a regular basis. If need be, you can set lower limits for certain types of coverage, such as collision and comprehensive, while maintaining a higher limit for medical payment and personal injury protection