Goldilocks got it right.

In the popular nursery tale, Goldilocks tries out the porridge, the chairs, and the beds before deciding which best suits her needs. She reviewed her options and she chose the option that was just the right size

When it comes to auto insurance, we all need to take a lesson from Goldilocks.

A Necessary Part of Life

Most states, with the exception of New Hampshire, require car owners to purchase auto insurance. Different states vary in what they consider an acceptable minimum but all mandate you must have liability insurance.

Liability insurance has one role: to protect you from losing everything you own if you’re sued for causing an accident. How much coverage you need depends on the value of your assets, including your property and savings. Coverage limits tie directly to your financial situation, so you need to be sure the policy you’re purchasing is a good fit for you.

Be wary of generic “one size fits all” coverage; the more you own, the more liability insurance you should have. Channel your inner Goldilocks and find the fit that is “just right” for you.

How Much Liability Do I Need?

How much coverage you need depends on how much you have in assets. If you cause an accident that injures someone, you may be on the hook for their medical bills and repairs to their property. If the bill you owe comes to $1.5 million (which is entirely possible with today’s cost of medical care), and the limit on your liability coverage is $300,000, you have a problem.

If you can’t write a check for the $1.2 million difference, don’t worry: the injured party’s attorney will be glad to take your home and assets to cover the million-dollar tab.

Most will suggest you purchase liability insurance of at least $300,000. Your agent should stress that there is a high probability that this will not be enough, however, if you’re at fault in a bad accident. Going with a higher limit of $500,000 or more may be worth serious consideration, especially if you have assets in that range or higher.

If you don’t have much in the way of assets, a smaller amount may be best for you. But understand that if your home is only worth $50,000, a lawyer will go after it to recoup damages for his/her client. If your insurance won’t pick up the tab, a lawyer worth their salt will find a way to get the money out of you another way.

Those Pesky Deductibles

Another consideration when choosing the auto insurance coverage that’s right for you is how much deductible you want to carry.

Car insurance deductibles are a factor of your risk, meaning the risk of you filing a claim. The deductible is the largest factor impacting your monthly premium. The higher the deductible you choose, the lower your monthly premium will be.

Sounds simple enough, right? Take another look.

Saving those few bucks each month may end up forcing you to pay more in the long term. Remember that car insurance deductibles don’t work like health insurance deductibles. Your health insurance spreads your deductible amount over the calendar year. So, if you have a $3000 deductible, that’s how much out-of-pocket expense you’ll have for the calendar year.

Not so with auto insurance deductibles. Each time you file a claim on your car insurance, your deductible kicks in. That means if you have a $2000 deductible, you’re expected to pay that amount before your insurance pays a dime, and that’s on _each _claim you file.

So, if your emergency fund can’t take a hit like that, you may need to consider a lower deductible. You have to be able to pay the deductible amount when the time comes, each time it comes around. Keep that in mind when choosing your deductible amount.

Determine Your Risk

In a perfect world, none of us would ever need to file a claim. But we live in the real world and there are risks involved with going about our daily business.

No matter how good a driver you are, we all have some risk. Do you do a great deal of your driving during peak drive times? That’s an increased risk. Are you frequently in busy parking lots, like school pickup lines, or navigating busy intersections? More increased risk.

What if you live in a rural area? Are you dodging deer on a regular basis? That’s a risk. Insurance companies are looking for “preferred risk drivers.” These are the ones who get better rates. Here are their qualities:

  • Age 25 or older

  • Good insurance credit score

  • Clean driving record

  • None or minimal not-at-fault claims

  • Homeowner

  • Previous liability limits of $100,000/$300,000 for the prior six months

If you’re a high-risk driver, you may save in the long run by going with a higher deductible. Get quotes from your agent on the different deductibles available to you before choosing the one that’s right for you.

Keep on Top of It

Consumer Reports suggests looking at the details of your car insurance each year and making adjustments where you need to in order to keep your policy on top of your needs. As your car ages, you can make changes to your policy to reflect that.

Keep on top of it, and you’ll do Goldilocks proud.