How Much Car Insurance Do I Need According to Dave Ramsey?

Car insurance provides financial protection against unexpected costs from vehicle accidents, theft, or damage. Dave Ramsey’s financial philosophy emphasizes self-reliance and protecting accumulated assets. His approach guides individuals in making informed coverage choices that support their financial well-being. This framework helps determine the right level of coverage.

Core Car Insurance Coverages Explained

Liability coverage is a key part of any car insurance policy, protecting you if you are at fault for an accident. It includes bodily injury liability and property damage liability. Bodily injury liability covers medical expenses and lost wages for individuals injured in an accident you cause, along with legal fees if you are sued. Property damage liability pays for damages to another person’s vehicle or property.

Collision coverage covers damage to your vehicle from an accident, regardless of fault. This includes incidents involving other vehicles or objects. Comprehensive coverage protects your car from non-collision events such as theft, vandalism, fire, natural disasters, or damage from falling objects.

Uninsured/underinsured motorist (UM/UIM) coverage protects you if an uninsured or underinsured driver causes an accident. Medical payments (MedPay) or personal injury protection (PIP) coverage covers medical expenses for you and your passengers after an accident, regardless of fault. PIP may also cover lost wages, and its availability varies by state.

Dave Ramsey’s Specific Recommendations for Coverage

Liability Coverage

Dave Ramsey recommends high liability coverage to shield your assets from potential lawsuits. He recommends limits of at least $500,000 in total liability coverage. This protects your net worth from large claims. Higher limits may be advisable for those with significant assets.

Collision and Comprehensive Coverage

Ramsey’s advice for collision and comprehensive coverage is tied to your vehicle’s value and financial stability. He suggests dropping these coverages once your car is paid off and its value has depreciated enough to replace it with cash from your emergency fund. This is based on self-insurance, where you assume risk for manageable losses instead of paying premiums. The premium savings can then be directed towards other financial goals.

Deductibles

Ramsey recommends selecting the highest available deductibles for any remaining coverages, often $1,000 or more. A higher deductible lowers your insurance premiums because you pay a larger initial portion of any claim. This strategy relies on a fully funded emergency fund to cover the deductible if an incident occurs. This helps prevent small claims from increasing your premiums.

Uninsured/Underinsured Motorist (UM/UIM) Coverage

Ramsey recommends uninsured/underinsured motorist coverage. It safeguards against financial issues from accidents caused by drivers without adequate insurance. This ensures your medical bills and vehicle repairs are covered, even when the at-fault driver cannot compensate you.

Medical Payments (MedPay) or Personal Injury Protection (PIP)

For medical payments or personal injury protection (PIP), Ramsey’s stance depends on your health insurance situation. If you have comprehensive health insurance, these auto medical coverages may be less important. However, if your health insurance is minimal or has high deductibles, MedPay or PIP can provide protection for accident-related medical costs.

How Your Financial Situation Impacts Ramsey’s Advice

Emergency Fund

Dave Ramsey’s car insurance recommendations are influenced by your financial situation, especially a fully funded emergency fund. This fund, typically holding three to six months of living expenses, is key to his insurance philosophy. It provides funds to cover high deductibles, such as $1,000, allowing you to benefit from lower premiums. Without this buffer, a high deductible could lead to significant out-of-pocket costs after a claim.

Being Debt-Free

Being debt-free, especially concerning your vehicle, is another financial condition that influences Ramsey’s insurance advice. When a car loan exists, lenders require collision and comprehensive coverage to protect their investment. Once the vehicle is paid off, this requirement is removed, and you gain the freedom to decide whether to continue these coverages based on the car’s depreciated value and your emergency fund. This aligns with his principle of eliminating debt for financial flexibility.

Depreciating Vehicle Value

The depreciating value of your vehicle is important in determining when certain coverages become less necessary. As a car ages and loses value, the cost of collision and comprehensive premiums can, at some point, outweigh the potential payout for repairs or replacement. This helps determine if you could comfortably replace the car with cash from your emergency fund. This assessment helps determine when self-insuring for vehicle damage is appropriate.

Practical Steps for Insuring Your Vehicle the Ramsey Way

Shopping for Quotes

Shopping for quotes is the first step to finding car insurance aligned with Dave Ramsey’s principles. Obtain multiple quotes from various providers to compare rates for high liability limits and deductible choices. An independent insurance agent can simplify this process by shopping policies from numerous carriers to find competitive rates.

Annual Policy Review

An annual policy review is important for managing your car insurance. This assessment allows you to adjust coverage as your financial situation evolves, such as when your emergency fund grows or your vehicle depreciates. It also provides an opportunity to identify rate changes or discounts you may qualify for. Reviewing your policy ensures it continues to align with your needs and Ramsey’s advice.

Paying Annually

Dave Ramsey suggests paying your insurance premiums annually if financially feasible. Many insurance companies offer a discount for paying the full year’s premium upfront, which saves money compared to monthly installments. This approach also eliminates monthly payment fees some insurers charge, reducing your total cost.

Exceeding State Minimums

While all states have minimum car insurance requirements, Ramsey advises carrying coverage that far exceeds these minimums. State minimums are insufficient to protect your assets in a serious accident, leaving you exposed to significant financial liability. These minimums are merely a legal requirement, not adequate protection.