Better safe than sorry
When considering auto and homeowners insurance, a lot of people don’t consider the importance of having enough liability coverage. In fact, many people are driving around with the minimum required liability insurance and don’t even realize it, and don’t know much must of a financial risk they’re taking.
First of all, let me explain what liability insurance covers. On your auto policy, you may see something like:
Bodily Injury Liability Limits: 100/300
Property Damage Liability Limit: 100
This means that if you cause an accident, your insurance company will pay out medical expenses for the other driver and their passengers of $100,000 per person, $300,000 total for the accident. They insurance company would also pay $100,000 in damage to other vehicles or property that is involved in the accident.
Think about it – if you cause an accident and the other driver is seriously injured and is in the hospital for several weeks or months, or is permanently injured for the rest of their life, you could be on the hook for several hundred thousand dollars easy. You could get sued for the damages. After the insurance company has paid their portion, you are responsible for the rest. This means that your savings, home, retirement, cars, and other personal possessions could be at risk. You could even have to pay future income for the rest of your life to make up for the expenses.
So, with that in mind, how much liability insurance is enough? A common rule of thumb is to make sure you have at least as much liability coverage as you have assets. If you have a $300,000 home, three cars totaling $50,000, a retirement plan, savings, furniture, appliances, etc… totaling around $500,000, you need at least $500,000 in liability protection. However, even if you have the $500,000 in liability coverage, that still may not be enough.
Going back to the example above; if someone is seriously injured in an accident caused by you, and you are responsible for $1,000,000 in medical damages, and you have $500,000 in liability insurance, you will be responsible for the remaining $500,000 after your insurance has paid their end. That would mean that even with the $500,000 liability coverage, you will still lose all of your assets to pay off your responsibility. This is where an umbrella policy comes in to play.
Insurance companies will typically sell a $1,000,000 for under $200 per year. An umbrella policy gives you additional liability protection after your primary policy has paid out. So, if you have $500,000 on your insurance policy, and a $1,000,000 umbrella policy, you would have a total of $1,500,000 in liability protection. Most people think that umbrella policies are only for the super-wealthy, but you can see from the example above that even the middle-class would be wise to increase their liability limits and carry an umbrella policy. An umbrella policy gives you additional coverage over your auto, home, boat, RV, and other insurance policies. So, if someone hurts themselves on your property and sues you for $1,000,000, your umbrella policy will cover it after your homeowners liability insurance coverage pays out.
You can see how important it is to consider the proper amount of liability insurance. It is often very inexpensive to increase those limits, and could save you hundreds of thousands of dollars in potential lawsuits. Please, make sure that you talk to your insurance agent about this. Review your coverages, consider your assets, and make the necessary changes.
A final note: most people don’t think that a huge financial loss like I outlined above can happen to them. They believe that the proper amount of liability insurance is a waste of money because they will never use it. The truth is that these types of car accidents and lawsuits happen every day, all over the world. People’s entire net worth is wiped out in the blink of an eye. Everything they’ve worked for and saved is gone. Now, it probably won’t happen to you, but there’s a good chance that it will (even good drivers get in accidents).
Better safe than sorry.