So for purposes of this discussion, let's assume you are buying insurance; the question will eventually come down to: How much? Well at the risk of sounding like a salesman for my favorite insurance company, under most circumstances, I suggest that 'more is better.'
So let me start with the exception to the rule. You don't need a lot of insurance if you don't have much. For example, let's say you are a 20-year old, out on your own, living in a studio apartment. You make $30k/year and drive an 8-year old Chevy with 95,000 miles on it. In Washington, you are required by law to carry a minimum of $25k in liability insurance. That's the amount that will be available to pay someone else if you are at fault for a car accident. So at the risk of sounding uncaring, if you hit someone and they are seriously injured, your insurance company will probably offer the $25k to settle the claim and obtain a release on your behalf. The injured person's attorney will want to check out your finances to see if they can collect anything from you. With no home, an old car, and a $30k/year job, they'll figure our pretty quickly that you are - essentially - judgment proof. They'll probably take the $25k and then seek additional monies from their own insurer under their own Underinsured Motorist Coverage. So you're off the hook with minimum policy limits.
What about the other coverages? Collision coverage? Comprehensaive coverage? I suppose this depends on the value of your car. The lower the value of your car, the lower the premiums will be for these coverages. However, at some point, you hit the point of no return. In other words, it doesn't make sense to spend $250/year to insure a $750 car with a $250 deductible. So ask your agent to provide you with various quotes; and then make the right $$ decision for you and your circumstances.
PIP and UIM coverages are something you definitely want. PIP provides medical and wage loss benefits - regardless of fault. If you don't have medical insurance, this is a no-brainer!! If you do have medical insurance, you may be able to get away without PIP coverage. But remember, PIP also covers the occupants of your car. Do they have medical insurance? And what will you do if you are injured, and can't work for 3 months? PIP will pay you $200/week during those 3 months. That might not sound like a ton; but when you're looking for money to pay your rent on that studio apartment; it might help a lot!! Your landlord won't excuse your rent payment just because you're hurt. Remember that PIP coverage will be on your policy unless you waive it in writing.
The same is true for UIM coverage. It must be waived in writing or it will exist on your policy. Normally, UIM coverage is written at the same level as your liability (BI) coverage. So if you have a $25k liability limit, the insurance company will automatically give you a $25k UIM limit. If you can afford it, I would suggest asking for a higher UIM limit. Remember, I'm not talking about the money your insurer will pay to someone else if an accident is your fault; I'm referring to money your insurer will pay you if you are hurt because of someone else, and that person doesn't have insurance -- or doesn't have enough insurance. If you are seriously hurt, it would be nice to know that you will be covered for all of your injuries!
So here's the bottom line for those in this financial realm: you're probably OK keeping lower limits on third-party coverage; and probably OK with lower (or no) coverage for your own car; but make sure you have good limits on UIM and, if appropriate, PIP. Talk it out with your agent. Ask for a quote for each type of coverage. A good agent can break it down for you; coverage-by-coverage type. You'd be surprised how little it costs -- for example -- to bump your UIM coverage from $25k to $100k.
Next entry, I'll discuss the same coverage issues for those with more to lose.