Insurance 101 (cont.)

Types of Coverage

Liability Coverage (about 60% of your premium)

When it comes to insuring yourself against damage or harm to others, you certainly don't want to skimp, leaving yourself vulnerable to a lawsuit that could take away your assets. Most states require you to buy bodily injury and property damage liability coverage. While you may be able to satisfy the law with bodily injury coverage that pays $20,000 for each person you injure, up to $40,000 per accident, and property damage coverage that pays $5,000, these are minimum figures.

Most insurance advisors recommend bodily injury coverage of at least $100,000 a person up to $300,000 an accident, and property damage coverage of $50,000. If your net worth is more than $300,000, you should carry coverage of $200,000 a person and $500,000 an accident, and perhaps an "umbrella" policy that will bolster coverage even further. A $1 million umbrella policy will typically add $120-$150 to your yearly bill--which you could offset by choosing a higher collision deductible.

Generally speaking, individuals in trucks and sport/utility vehicles are less likely to be hurt in an accident. But in a collision, particularly with a smaller car, trucks and SUVs do more damage. As a result, you may want to consider boosting your liability coverage.

You also won't want to skimp on uninsured or underinsured motorist coverage. This pays for injuries to your passengers and for expenses health plans don't cover if you are involved in an accident with an uninsured driver. Keep in mind that one in ten drivers across the country has no auto insurance.

On the other hand, don't buy more coverage than your net worth requires. If you don't own a home and you've wiped out your bank account to put a down payment, you may not need that $1 million umbrella policy.

Collision and Comprehensive Coverage (about 40% of your premium)

Many people can also save on other parts of their policy. Collision coverage pays for damages to your vehicle caused by an accident, while comprehensive coverage pays for damage to your vehicle caused by other risks, such as theft or fire. Unlike liability coverage, collision and comprehensive coverage is often subject to a deductible--an amount you must pay before you can make a claim.

Having a high deductible can save you substantial sums on the collision and comprehensive portion of your total insurance bill. For example, one insurer charges $99 a year more for a policy with a $300 deductible than for one with a $500 deductible. This means you'd pay almost $100 per year to save, at most, $200 if you have an accident. Instead, if you put that $100 in the bank each year, you'd soon have enough to pay the full deductible in the event of a collision. Or you could use that $100 to boost your liability coverage. Because you don't want to collect on minor mishaps and risk raising your premiums, you'll want a high deductible anyway. Collecting $50 beyond a $250 deductible to replace a $300 cracked windshield could prompt the insurer to raise your total premium by several hundred dollars.

Other Coverages

Medical coverage pays hospital and doctor fees for the driver and passengers. But if your health insurance already covers these costs, you may not need medical coverage included with your auto insurance.

If you live in a state with no fault insurance, you may be required to buy personal-injury protection that covers your medical bills. But you may be able to cut some of the costs for this coverage if your heath plan covers you in an auto accident.

There are a number of other minor types of auto insurance, such as towing coverage. If you're a member of an auto club that provides towing service, you may not need the additional coverage.