How much car insurance do you really need?

If you’re going to be driving a vehicle in Canada you need to have car insurance — it’s the law. 

This being the case, the first few questions that come to mind for most drivers are: What kind of car insurance do I need? And how much coverage do I need?

The answer to both of these questions is: it depends.

What kind of car insurance should I get?

It’s always good to start by understanding what the basic level of car insurance coverage includes. There are three tiers of coverage: third-party liability, collision, and comprehensive.

1. Third-party liability coverage

Think of third-party liability coverage as the entry level version of car insurance. Third-party liability coverage is mandatory across Canada, as it protects you from having to pay for any damage you cause to someone or their property. If a person is killed or injured as a result of an at-fault collision committed by you, your third-party liability coverage will kick in. 

2. Collision coverage

In addition to the protection provided by third-party liability coverage, collision coverage protects you if you hit another vehicle or object, such as a guardrail or concrete parking lot slab. Collision coverage is optional if you own your vehicle outright, but mandatory if you finance or lease it. If the deductible for your collision insurance exceeds the value of your vehicle, it’s usually recommended that you don’t get this coverage.

3. Comprehensive coverage

This is the most complete type of car insurance coverage you can buy. Comprehensive or full coverage car insurance provides a broad range of protection against things that can damage your vehicle while it’s stationary, such as hail, theft, and flooding.

Every time you go up a level in insurance coverage, it will cost you more in monthly premiums. It’s also important to note that the minimum amount of required car insurance coverage varies from province to province. So if you’ve moved to a new province, confirm with your insurance provider whether you need to increase your coverage or can reduce it to save yourself some money.

Comprehensive coverage is worth having but Consumer Reports recommends dropping it when your annual premium equals or exceeds 10% of your vehicle’s cash value.

How much car insurance do I need?

Insurance is like many other things you can purchase: there’s the basic version and then there’s the recommended amount of auto insurance coverage you should have for your car.

For example, you may be wondering “How much third-party liability insurance do I need?” In the province of Ontario, the mandatory minimum amount of third-party liability coverage a driver has to have is $200,000, though most people carry $1 million to $2 million.

If you are found to be at fault for a collision and the other party involved sues you for damages and wins, your third-party liability insurance will only pay for those damages, up to the amount of coverage you have. So, if the damages awarded totalled $500,000 and your coverage is only for $200,000, the remaining $300,000 would have to come out of your own pocket. Plus, you’ll also be on the hook for the cost of the lawyer your insurance company had to hire to defend the claim.

If there were passengers in your vehicle at the time of the collision, they could sue you for damages as well. If you lose the case and your third-party liability coverage isn’t enough to cover the damages awarded, you will be responsible for paying the difference.

When it comes to collision coverage, if your car is damaged in a collision, the most your insurance company will give you for it is the value of the car. This is why sometimes it’s not worth having collision coverage. For example, if the replacement cost of your car is $2,000, and you’re paying $2,500 for collision insurance each year, it’s not worth having the coverage. The  same is true of comprehensive insurance. As mentioned earlier, if the replacement cost of your vehicle is less than the cost of the annual premium for the coverage, it may not be worth having comprehensive coverage.

Consider add-ons to your car insurance policy

Depending on where you live or your personal circumstances, you might want to consider more than the recommended amount of car insurance coverage. You can purchase additional forms of coverage, also referred to as “endorsements” that can protect you from perils not included in your base policy.

If you rely heavily on your vehicle and would not have an alternate mode of transportation in the event it’s totalled or in need of repair, you might want to consider a rental car endorsement. This will cover the costs of needing to use a rental car for a period of time.

Another add-on to consider is an accident forgiveness waiver, which absolves you of any increase to your premiums in the event that you’re involved in your first at-fault collision. Keep in mind, though, that this waiver doesn’t follow you from provider to provider. So if you switch insurance companies, your rates could still rise based on the fact that you have an at-fault collision on your driving record.