Is record inflation leaving you underinsured?

Inflation has soared to a 40-year-high, and like nearly everything else, auto insurance rates are increasing. Bankrate expects more insurance rate hikes to continue as insurers try to build back reserves while accidents and repair costs remain high. But as prices continue to skyrocket, you need to consider how rising costs affect more than just your budget. While your car insurance premiums increase, your car insurance coverage remains the same. And as medical and vehicle repair costs rise, your coverage today may not go as far as it used to, potentially leaving you underinsured. Bankrate shows you how inflation affects car insurance, why rethinking your coverage is important and how increasing your coverage may affect your bill.

Inflation affects car insurance coverage

Depending on your car insurance coverage, your policy can pay for many things in an accident, such as damage to your vehicle, damage you cause to another driver’s vehicle and injuries. The problem is that inflation is driving up vehicle repairs and injury-related costs, such as medical bills. Inflation and increased accident frequency are causing insurance companies to raise policyholders’ car insurance rates to compensate for these higher and more frequent expenses.

However, despite paying more for your policy, inflation is also lowering the level of financial protection your car insurance provides. Understanding this issue and your current car insurance coverage is key to deciding if you need more coverage. Bankrate talked with LexisNexis — a leader in data analytics and industry monitoring — to gain deeper insight into how inflation affects car insurance. Below are the car insurance coverage types primarily affected by inflation.

Medical costs have increased

Adam Pichon, Vice President and General Manager of U.S. Personal Lines Insurance for LexisNexis, talked with Bankrate about how inflation is affecting car insurance coverage limits. “Liability claim severity has been rising significantly over the last 10 years or so. Medical costs have been rising very quickly for a long time.”

Consumer Price Index data shows that medical care service costs rose 5.4 percent between October 2021 and October 2022. Because medical expenses cost more, your coverage limits won’t go as far. Since different car insurance coverage types pay for medical bills in an accident, you may be at risk being underinsured. Your bodily injury liability, medical payments, personal injury protection, uninsured motorists bodily injury and underinsured motorists coverage pay toward medical-related costs from an accident.

So the question is, is your coverage going to be sufficient?

— Adam PichonVice President and General Manager of U.S. Personal Lines Insurance for LexisNexis

For example, the average bodily injury liability payout in 2021 was $22,734 per accident, according to the Insurance Information Institute. This represents over a $3,000 increase from the average bodily injury claim in 2020, which was $19,691. On top of that, because injury-related costs have increased 5.4 percent year over year, the same accident could cost $23,962 in 2022.

Pichon notes that not all drivers will need to update their coverage. “It depends on the liability coverage you bought. In some of those states [with lower required limits], the minimum required limit is approaching a point where it’s not really sufficient to cover a person in an accident.” Essentially, this means that drivers with lower coverage limits may find that inflation is making their coverage insufficient. Increasing limits to keep pace with inflation could help you avoid high out-of-pocket costs.

Vehicle costs have increased

According to a Bankrate survey conducted in November 2022, 53 percent of adults in the United States have put off a major financial milestone because of the economy, with 21 percent avoiding buying or leasing a car. Although overall inflation has eased in recent months (9.1 percent year over year in June 2022 compared to 7.7 percent year over year in October 2022), the state of the automobile industry is still quite grim.

Inflation has also caused the cost of new vehicles to go up 8.4 percent and used vehicle costs to increase 2.0 percent from October 2021 to October 2022. Cars are getting more expensive, which means higher repair and replacement costs if you damage or total someone’s vehicle in an accident or if they total yours. The table below illustrates the price increases in vehicle parts and equipment; it’s not hard to spot the massive price spike that started in 2020.

Pichon has seen this trend in action. “Vehicles have gotten pretty expensive, and you want to make sure the [property damage liability] limit you are carrying is going to cover that. It’s not uncommon these days to be driving behind a car that costs $70,000 or $80,000, and these are not luxury cars.”

Just like with medical costs, car insurance policies have coverage types designed to pay for vehicle damage. These include property damage liability, comprehensive coverage, collision coverage and uninsured motorist property damage coverage (where available). Due to the increased cost of vehicles and parts, your policy’s coverage limits may be insufficient, especially if you are carrying lower liability limits. To account for increased expenses, if you were to be involved in an at-fault accident, it might be worth considering bumping up your coverage to minimize your risk of being underinsured.

Finding the right coverage in today’s economy

So, prices are increasing, and your car insurance isn’t giving you as much financial protection as it used to. What can you do about it? A solution exists: increase your coverage limits.

Paying a higher car insurance bill isn’t anyone’s idea of fun, especially right now. But your car insurance is integral to your overall financial health. Your coverage amount could mean the difference between financial discomfort and financial devastation. Pichon agrees, noting that “It’s [about] periodically evaluating where you are from a financial and life perspective” and making sure that your coverage limits are adequate.

We used data from Quadrant Information Services to illustrate that increasing your liability coverage generally doesn’t result in a huge premium increase. Even so, getting a quote before you make changes is always a good idea. “Everything’s relative,” Pichon says, “the prices will vary for every insurance company.”

You could get 10 times more coverage, but it won’t be 10 times the price.

— Adam PichonVice President and General Manager of U.S. Personal Lines Insurance for LexisNexis

The rates in the table below are for full coverage — meaning comprehensive and collision are included — but varying liability limits. Although more coverage generally means paying more, it might be worth it to better protect your financial health. The premium increase for higher limits may not be too significant. For example, going from state minimum liability limits to 50/100/50 coverage is a 5 percent increase, or $7 a month.

Will I be over-insured if inflation goes down?

The answer to this is a bit tricky.

First, there is such a thing as over-insuring yourself. However, unless you increase your limits significantly, you likely won’t be over-insured if the economy starts to level back out. Higher limits provide more financial protection, so keeping the higher limits may be a good thing.

“As people progress through life, they have money and assets they are collecting and trying to protect for long-term planning. You want to protect those via various types of insurance, including auto insurance,” Pichon explains. “As you go through time, you probably should be increasing your liability insurance. I don’t think there’s a risk, if you raise your limits, you would want to go back [to the lower limits].”

Car insurance rates are fluid. If you decide to raise your liability limits to keep up with inflation, you can readjust them when (or if) vehicle and medical costs return to baseline — and you don’t need to wait for a renewal to do so. The goal is not to over-insure yourself but to make sure you are financially protected with sufficient coverage based on today’s costs. If you have questions, meeting with your insurance agent to discuss your financial goals and risk tolerance could help.

Saving on car insurance costs

Auto insurance costs are rising, and increasing your limits will likely nudge your bill even higher. However, there may be ways to offset some costs and save on your car insurance policy:

• Shop around: Getting car insurance quotes from different companies allows you to compare rates, coverage offerings, discounts and third-party scores to find the cheapest car insurance for your needs.
• Utilize discounts: Most companies offer car insurance discounts to help you control your premium. Some common and impactful discounts are multi-policy, multi-car, safe driver and paperless.
• Try a telematics device: Telematics discounts are relatively common and can help you earn a personalized discount. These programs track your driving habits via a mobile app or vehicle plug-in device and could reward you with savings if you drive safely.
• Consider paying in full: If you’re able, you may want to pay your car insurance premium in full rather than in monthly installments. In addition to earning a potential discount, some companies charge installment fees which are typically waived if you pay in full. However, if paying in full causes financial hardship, you might want to stick with monthly payments.
• Avoid accidents and tickets: Obey posted signs, practice defensive driving skills and stay safe on the roads. At-fault accidents and ticket convictions generally increase your car insurance premium.

The bottom line

Inflation is soaring to record highs and, at least in terms of vehicle and medical costs, doesn’t seem to be slowing down any time soon. These higher medical bills and vehicle repair costs mean that your insurance coverage might be insufficient to properly protect your finances in an inflationary environment. While premium increases continue due to inflation and accidents, increasing your coverage limits may be worth considering. After all, it can be reassuring to know that you’re financially protected by reducing your risk of out-of-pocket expenses in an accident. While the goal is not to over-insure yourself and inflate your premiums unnecessarily, the right coverage is crucial and can offer you the peace of mind you need every time you’re behind the wheel.

• Methodology

  Bankrate utilizes Quadrant Information Services to analyze 2022 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Rates are weighted based on the population density in each geographic region. Quoted rates are based on a 40-year-old male and female driver with a clean driving record, good credit and the following full coverage limits:50/100/50 level:

  • $50,000 bodily injury liability per person
  • $100,000 bodily injury liability per accident
  • $50,000 property damage liability per accident
  • $50,000 uninsured motorist bodily injury per person
  • $100,000 uninsured motorist bodily injury per accident
  • $500 collision deductible
  • $500 comprehensive deductible

  100/300/50 level:

  • $100,000 bodily injury liability per person
  • $300,000 bodily injury liability per accident
  • $50,000 property damage liability per accident
  • $100,000 uninsured motorist bodily injury per person
  • $300,000 uninsured motorist bodily injury per accident
  • $500 collision deductible
  • $500 comprehensive deductible

  250/500/100 level:

  • $250,000 bodily injury liability per person
  • $500,000 bodily injury liability per accident
  • $100,000 property damage liability per accident
  • $250,000 uninsured motorist bodily injury per person
  • $500,000 uninsured motorist bodily injury per accident
  • $500 collision deductible
  • $500 comprehensive deductible

  To determine minimum coverage premiums, Bankrate used minimum coverage that meets each state’s requirements and added comprehensive and collision coverage.Our base profile drivers own a 2020 Toyota Camry, commute five days a week and drive 12,000 miles annually.These are sample rates and should only be used for comparative purposes.