Financial Friday- Auto Insurance

How much liability insurance is enough?

by Ratna*

I know, I know! It’s Financial Friday and It’s supposed to be about “finances” not liability and getting sued but sadly, if you have drivers in your home, whether under or over 25 years of age, the type of auto insurance and the amounts you carry can affect your overall financial health in the long run. Of course, we all hope and pray it does not happen and we do our best to be good, safe drivers but hoping, praying, and driving well yourself does not prevent some other reckless driver, in a split second, to possibly take away what you have worked a lifetime to built- your nest egg, your savings, and other liquid assets.  I’ll cover sheltering in a future article.

My recent minor fender bender got me researching and got my husband and I talking. I was not at fault and this was a very minor fender bender, but still something like this does get you to be more careful, and gets you thinking about the “what ifs.” While we have young toddlers in our household present day, we started talking about what we need to do financially as they become of driving age. Even if your kids are not driving your car, they can drive a friend’s car and be exposed to the same risks. If a dependent in your household (not emancipated), and one that is under your insurance or not, gets involved in a car accident, you (yes, you) can be held personally liable for anything over your liability coverage amounts. So, it’s not only important to know what type of coverage you need, but how much you need and these needs can change over time.  Here are two major types of coverages and your company may offer varying amounts of coverage for different prices. The more coverage you get, the more you will pay, but peace of mind may be worth it depending on your circumstances.

1. Bodily Injury Liability Coverage pays for losses if you are at fault in an accident, and are legally responsible for others’ injuries. Medical expenses fall under this type of coverage and this is the coverage that is key when you are deciding how much coverage is right. I have seen policies offered up to $1 million/per person, per accident. You may think $1 million seems extreme but if you have four passengers in the other car or even pedestrians who get injured or there are long-term medical conditions, you do not want a situation where you become responsible for medical expenses that exceed your coverage limit. So, for example, if you injure four people in an auto accident, and each person has $75,000 in medical costs and your coverage is limited to $100,000 per person, $300,000 per accident, you coverage limit would be adequate but the same scenario and if the medical costs exceed $300,000 for that accident, you may be sued for the remaining amount. When you are sued personally, keep in mind, it exposes you and your assets to risk if you cannot pay a court judgment against you.

2. Property Damage Liability is different than bodily liability in that it helps protect you from bills that can include-structural damage to homes, structures, and repair/replacement for vehicle or other objects. This is where everything else falls that affects “property” but not a “person.” A good rule of thumb here is to consider how much it would cost to repair multiple vehicles, a fence, a home, or structures if the accident is severe. Generally, speaking, most accidents do not see property damage exceed bodily injury and damage unless multiple vehicles are involved and multiple individuals.  It is generally the medical payments and personal liability which need to be at higher amounts but still keep in mind that if you hit another vehicle and you are at fault, if the other car is a total loss at $40,000, and you only have $25,000 coverage, then you could personally be liable and sued for the remaining $15,000.

Keeping the above in mind, it is a good idea to assess and re-assess coverage limits as your life situation changes over time. When kids are young, you want to have enough coverage to cover any potential accidents, yourself, and protect against uninsured motorists.  But, as kids start driving, you may need to increase your liability in the Bodily Injury Liability coverage. As cost of living changes, cost of medical insurance increases, the different coverages offered may change as well so call your insurance company and talk to a knowledgeable agent- one who can give you sound advice.

In my next article, I will cover what you need to do in the meantime financially.  After all, we do not plan accidents and we certainly do not expect to get in one but if we do, it may be too late to shuffle your money around at the last minute. So, it is good to plan for liability, lawsuits, and invest in a way that cuts down your liquid assets on hand as well. In the next article, I will also address bankruptcy.

*Disclaimer: All and any parts of this series were written by the author in her personal capacity and not attributed to her profession, or any organizations, employers, or the like that author is affiliated with. The author is interested in these topics and blogs for recreational purposes and not for financial gain. All views and opinions are of the author and not attributable to any company and not meant as an endorsement to any company or organization. Most importantly, author is not a financial expert, tax attorney, estate planner, insurance agent, broker, or accountant, nor works in the financial planning field. This article is written solely for the purpose of sharing information and knowledge with the readers. All readers should consult with their own attorney, tax planner, financial, insurance agent, or estate planner, and/or accountant prior to making investment decisions. The author is not liable and will be held harmless for any investment loss or risk undertaken as a result of opening any of the accounts or information aforementioned.

5 comments

Great info, Ratna! Definitely gets you thinking!!

Great info! How does this related to the ratios? I know we carry $100/$300 – but don’t recall what those refer to…I know, I should be more savvy, but I hate to think about insurance until I need it and then it’s too late.

Daria- yes that is the same thing as the ratios… Most insurance companies offer different tiers of coverage up to $1 Mill/$1 Mill — there are usually three numbers and they go like this as an example: Bodily Injury Liability (per person/per accident) and the third number is: Property Damage Liability so, if you have 100,000/300,000/100,000 as an example, the Bodily Injury Liability is $100K per person (Bodily Injury Liability coverage) and up to $300,000 per accident and the last number represents the property damage total liability insurance. This is the AVERAGE coverage so the numbers can be LOWER or HIGHER – up to you but you have to decide what is right and it also depends on the vehicle you drive.

Another thing to keep in mind is that you can select Uninsured Motorists (UM) Coverage, this is the amount that will be represented in two amounts: Ie. $100,000 per person/$300,000 per accident – just in case you hit an UM. Then you can pick medical payments for your passengers or the kids your kids will tow around 🙂 Get them a stick 2-seater I say or a small pick up truck. Ha! Hope that answers your question, Daria, and thanks for posting. Your blog, savingtoberich.com is an amazing resource as well!

Thanks Ratna! I do have the uninsured motorist coverage. My dad told me when I first got my own policy that at a minimum you should have $100/$300 because at those levels it is worth it for the insurance company to defend you – else they throw you to the wolves essentially because defense fees are more than your coverage. Does that make sense?

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