Understanding minimum car insurance requirements

Most states mandate that you carry automobile insurance and have laws outlining the minimum amount of liability coverage you must purchase.

However, those minimum amounts may not be enough, especially if you're in an accident. The cost of a car accident can be much more than the limits required by most states. The Insurance Information Institute recommends that you carry at least $100,000 of bodily injury protection per person and $300,000 per accident (known as 100/300).

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What do those three auto liability insurance numbers mean?

Perhaps you've wondered about the three numbers that are part of the auto liability insurance that you bought.

1. The first number is the bodily injury liability maximum coverage for one individual who's injured in an auto accident.
2. The second number is the maximum amount of bodily injury liability coverage per accident.
3. The third number represents the maximum amount of property damage liability, and it's per vehicle.

For example, if you live in North Carolina, the numbers are 30/60/25, which means the minimum liability limits are $30,000 for injuries to one person, $60,000 for all injuries and $25,000 for property damage in one accident. In Wyoming, the figures are 25/50/20, which means that the minimum liability limits are $25,000 for injuries to one person, $50,000 for all injuries and $20,000 for property damage per vehicle in an accident. And if you reside in Michigan, the numbers are 20/40/10, meaning that the minimum liability limits are $20,000 for injuries to one person, $40,000 for all injuries and $10,000 for property damage per vehicle in an accident. (See: "5 misunderstood car insurance policy terms.")

The typical minimum amount of auto liability insurance coverage is 20/40/15, says Robert Passmore, senior director, personal lines policy, Property Casualty Insurers Association of America (PCIAA). States have held these numbers pretty stable over the years, says Passmore. "Most people carry more than the minimums," he notes.

Understanding auto insurance liability coverage across state lines

What happens if you hold the minimum amount of automobile insurance coverage required in your state and you're involved in an accident in another state that requires higher minimum coverage? Will your auto policy's coverage automatically increase to meet the other state's minimum coverage requirements?

For example, say you live in Ohio and hold the minimum amount of coverage, which is 12.5/25/7.5/ (This means that the minimum liability limits in this state are $12,500 for injuries to one person, $25,000 for all injuries incurred and $7,500 for property damage for one vehicle in an accident.) What happens if you then travel to Maine for a vacation (where the limits are 50/100/25) and are involved in an accident that requires higher minimum coverage?

(In December, Ohio's minimum requirements are changing. Minimum-insurance requirements will be 25/50/25.)

Fortunately, most policies would cover an accident in another state that requires higher minimum coverage, says Passmore. Your policy will typically automatically increase to meet that state's minimum coverage. It's important to read your policy to determine if that is true, he says.

"The advice I give to people about buying auto insurance is: Consider what you can afford and what you're trying to protect, and discuss this with your agent," Passmore says. "You might want to raise your deductible, and you can also shop around for coverage. It won't take you much time, and it really pays off." (See: " 5 ways to compare car insurance companies.")

What's the definition of no-fault car insurance?

A dozen states -- including Florida, New Jersey, Kansas, New York, Minnesota and Michigan – have no-fault automobile liability insurance laws. No-fault car insurance limits your ability to sue the other driver in the event of an accident, says Passmore. If your state has a no-fault auto insurance law, your policy must pay medical bills for you and your passengers regardless of who caused the accident.

True no-fault states require drivers to purchase minimum levels of personal injury protection (PIP) coverage. The amount of coverage required varies by state, as does the nature of the coverage.  Depending on the state, PIP coverage may reimburse the policyholder for medical and other accident-related expenses as well as lost wages. (See: "Learn about no-fault auto insurance.")