The last time you met with your auto insurance agent, you had a lot on your mind: your next appointment, your grocery list, your yard work. So you nodded as he talked about low deductibles and roadside assistance extras and signed the contract before scrambling out the door. But now it’s time to renew your policy, and as you browse through your paperwork, you begin to wonder if those high monthly premiums are a result of carrying too much insurance on your vehicle. But how do you know if you’re over-insured?
Before we get started, remember that driving a car that’s over-insured is preferable to being uninsured. Every state except New Hampshire requires drivers to carry liability coverage, which pays for injuries to passengers and damages to other vehicles and property when they cause an accident. Some states require additional forms of coverage to get on the road legally. Failing to carry these minimum amounts of insurance can result in penalties ranging from blemishes on your driving record to fines to jail time, and causing an accident without insurance can be financially crippling.
However, the amount of liability coverage the law requires you to carry might be lower than the amount you’re paying for each month. For example, Florida requires its drivers to carry $20,000 worth of bodily injury liability coverage and $10,000 worth of property damage liability coverage — meaning the insurance company pays these amounts for claims resulting from an accident that you caused [source: Florida Department of Highway Safety and Motor Vehicles]. If you’re insured for $300,000 of bodily injury liability and $50,000 of property damage, you can reduce your coverage and probably pay a lower premium.
But whether or not this is a good idea depends on your financial situation. If you cause an accident and the damages exceed your coverage, a lawsuit could target your financial assets — your home, salary and certain investments — to make up the difference. However, if you earn a modest salary and have few or no assets, you can typically get by with less coverage.