The hidden cost of minimum car insurance coverage

News flash: The median price drivers now pay for annual car insurance coverage is $2,079. With grocery, utility, gasoline, and other costs rising and consumers seeking to save dollars wherever they can, it's not surprising that many policyholders are opting to lower their insurance coverage levels (often by sacrificing collision coverage).

For some, reducing coverage is the right call. But while this strategy can lower your premium, it could also leave you financially vulnerable. Just imagine being involved in a multi-car crash with bodily injury claims and a totaled car, but you only have minimum coverage that's legally required in your state. It's an outcome that could drain five to six figures from your bank account.

In this article, TheZebra.com helps you better understand the risks behind dropping coverage, scenarios where it's recommended, why you shouldn't rely on state minimum coverage, and alternative ways to pay less.

When Dropping Coverage Actually Makes Sense

Decreasing your level of protection can actually be a shrewd move for certain drivers. If your vehicle isn't worth much, and the total cost of comprehensive, collision, and your chosen deductible surpasses what your carrier will likely pay out on a claim, dropping down to liability-only coverage may be the right choice.

"Let's say your car is worth about $4,000, carries a $1,000 deductible, and costs $900 a year to insure for physical damage; the maximum net insurance benefit may be roughly $3,000 before considering claim timing and rate effects," explains Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College. "It can also make sense to drop down to liability-only coverage when your car is stored, rarely driven, or replaced by a cheaper vehicle."

When a Fender Bender Becomes a Financial Crisis

But especially if your car's value exceeds around $4,000, this tactic could backfire in a big way. Your liability-only policy may not adequately cover a significant accident involving several motorists, serious vehicle damage, and costly bodily injuries.

"Liability-only insurance pays for injuries and property damage you cause to other people when you are at fault in an accident," says Janet Ruiz, director of strategic communication for the Insurance Information Institute. "It generally covers medical expenses, lost wages, legal defense costs, and repairs to another person's vehicle or property up to your policy limits. But it does not cover damage to your own vehicle, theft, vandalism, hail damage, flooding, or injuries to you, unless you have purchased additional coverages."

Andrew Kryder, a Chicago-based accident and injury attorney, believes it rarely makes sense to drop car insurance coverage.

"If you are concerned about the cost of auto insurance, consider lowering your coverage levels before dropping certain types of coverage altogether. It's better to have some coverage than none at all," he says.

Why State Minimums Aren't Enough

Here's the major mistake many policyholders make: They assume they're sufficiently protected by merely carrying the legal minimum coverage necessary in their state. While liability coverage is required in most states, the limit mandated by your state may not be sufficient if you're responsible for a costly accident that involves medical expenses and property damage. State minimums were often set years ago and don't adequately reflect the true cost of contemporary vehicles, litigation, or medical care.

Case in point: In Louisiana, the minimum liability limits are 15/30/25, meaning bodily injury liability pays $15,000 per person and $30,000 per accident for injuries you cause to others, and property damage liability pays $25,000 per accident for property damage you cause.

"These limits were set in 2010 and have not been raised since. But over that time, medical costs and the price of automobiles have skyrocketed," says New Orleans-based personal injury lawyer Loyd Bourgeois, who adds that the average new vehicle now costs $50,000, much higher than that $25,000 property damage limit. "The average insurance claim for a bodily injury nationwide is over $28,000. Between an ambulance, ER visit, diagnostic imaging, and follow-up appointments, even a minor injury quickly exceeds the $15,000 limit."

And in a multi-vehicle crash with multiple occupants in each car, you could have several injured individuals trying to split that $30,000 max payout for injuries, "which can lead to underpayment of all parties and drawn-out legal battles over how the money is divided," Bourgeois continues.

Why Today's Accidents Cost So Much More

Gas and groceries aren't the only prices that have escalated lately. Medical bills, emergency treatment, lost earnings, and legal costs are way up, too. One serious bodily injury claim involving minimum liability-only coverage can easily exceed six figures, and you're on the hook for whatever tab remains after your carrier pays out.

"Vehicle repairs have become significantly more expensive because modern cars contain advanced driver assistance systems, cameras, sensors, and specialized materials. There are labor costs, litigation costs, and inflation to factor in, as well," Ruiz says. "Medical costs have also risen considerably, and serious bodily injury claims recently involve extensive treatment, rehabilitation, and potential litigation."

Kryder cautions that, in his experience, it's not uncommon for a moderate car accident to reach or exceed $100,000 in liability exposure nowadays.

Why Rushing to Pay Off Your Car Can Backfire

If you're financing a vehicle, your lender typically requires carrying collision and comprehensive coverage until the loan is paid off. Some drivers opt to make accelerated payments to get to the loan finish line quickly, enabling them to drop full coverage and save money.

While paying off a vehicle early can be financially smart, removing physical damage coverage just to decrease premiums can create a dangerous coverage gap.

"For instance, saving $50 per month by dropping collision coverage amounts to $600 annually. If that vehicle is worth $20,000 but later totaled in an at-fault accident, the driver may have saved hundreds but lost tens of thousands," warns Ruiz.

The Rental Car Risk

Another area of coverage the cost-conscious take scissors to is rental reimbursement. Removing this from your policy is easy and could save between $2 and $15 per month, but ponder the possible drawbacks. If your car needs repair following an accident, and the fix will run two or more weeks (more common than you think considering continued parts shortages and shop backlogs), you'll be without wheels for quite a long stretch. An out-of-pocket car rental could set you back $400 to $600 per week.

"If repairs take three weeks and a basic rental costs $45 to $65 a day before taxes and fees, the out-of-pocket rental cost can run roughly $945 to $1,365 in a hypothetical 21-day repair. This is far more than the annual premium for many rental reimbursement endorsements," Shirshikov points out. "The risk is even bigger for drivers who can't work, take children to school, or attend medical appointments without a car."

Smarter Ways to Lower Your Premium Without Gutting Your Protection

Instead of cutting coverage and taking risky gambles, explore alternative ways to save money:

* Shop around. Get rate quotes for the same coverage limits among several reputable carriers.

* Raise your deductibles. Increase comprehensive and collision deductibles to an amount you can still swing, which will lower your premium.

* Bundle policies. Use the same insurer for your home and auto policies, which should trigger a bundling discount.

* Maintain a good driving record. This should eventually result in lower rates.

* Qualify for discounts. You may be eligible for good driver, mileage, telematics, multi-car, student, safety feature, and anti-theft discounts.

* Review the finer details. "Check your annual mileage, garage and address, household drivers, vehicle choice, and payment plan options for accuracy, and update your policy as needed," Shirshikov recommends.

Ultimately, "the goal should not be to buy the cheapest policy possible," suggests Bourgeois. "It should be to remove any coverage you can reasonably afford to self-insure while keeping protection against losses that could seriously damage your finances and your family's future."

This story was produced by TheZebra.com and reviewed and distributed by Stacker.

Distributed by Newsbank, inc.