How to Choose Your Car Insurance Policy Limits

Although I consider myself a fairly responsible personal financially speaking, I have to admit I've been known to avoid changing car insurance policy limits because it's just so complicated. All those numbers and formulas and variables'"and I always feel like I'm playing right into the insurance company's hands.

In my family, we tend to drive vehicles until they can't be driven any more. We don't go out and buy a brand new car every three years, so our car insurance policy limits need to be adjusted regularly. But when I start thinking about lowering policy limits on my older car, I worry that as soon as I make the change, disaster will strike and I won't have sufficient coverage.

It's a common problem. So how do you sort through all the intricate details and choose your car insurance policy limits?

Liability Policy Limits

This is the one facet of car insurance that I don't scrimp on. It doesn't matter how old my car is; if I rear-end a brand new luxury sedan, I'm going to pay through the nose. I typically choose the highest car insurance policy limits when it comes to liability.

Everyone doesn't think like me, though. If you'd rather save on your monthly payments and take your chances with an accident that might never happen, that's your choice. You wouldn't be the only one.

Just make sure your liability policy limits fall within the acceptable range for the state in which you live. Each state has minimum financial responsibility requirements, and if you don't purchase that minimum, you could be in a heap of trouble.

For example, according to insurance expert Bobbie Sage , the minimum requirements for Arizona are only 15/30/10, while in Maine they are 50/100/25. That's a significant difference, so you'll have to check out the minimum requirements for your state.

Collision Policy Limits

Collision auto insurance protects you against damage caused to your personal vehicle rather than someone else's. For example, if you rear-end that aforementioned luxury sedan and you don't have liability insurance, only the sedan's damage will be covered. If you have collision, however, the damage to your own car will be covered as well'"up to your car insurance policy limits, that is.

In my opinion, collision insurance policy limits should be based on several factors, including the Blue Book value of your vehicle. If you're driving around in a ten-year-old coupe with 125,000 miles on it, you might not want to spend much on collision insurance. You'll probably pay more in premiums than your vehicle is actually worth.

However, you should also consider your ability to purchase a new vehicle should your current mode of transportation be totaled. It's worth it to increase your collision car insurance policy limits if you have few cash reserves because you don't want to be left without a car.

Comprehensive Policy Limits

Comprehensive car insurance protects against natural disasters, theft, vandalism, and other non-collision-related damage. This is always a gamble because, after all, your car might never be stolen or destroyed during a tropical storm.

Again, consider the value of your car. In most cases, comprehensive insurance will pay only up to the market value of your vehicle. This means that paying for the highest policy limits on an older car will just be money down the drain.