How Much Liability Coverage Should I Have?

Many people face this question every year when they are reviewing their insurance policies. It comes time to look at that auto insurance policy and you notice that you have been pouring a lot of money into XYZ Insurance Company’s bank account. You wonder how on earth can you lower your rate, and typically the liability coverage is the first thing to be scrutinized. Is having $300,000 of liability on your auto insurance too much coverage? Are you being over insured? Well, let’s take a look at what someone might actually need.

Insurance is to protect You and your assets. Let’s say that you are in an at-fault collision and the person or people that you hit needs to go to the hospital. It’s not uncommon to be in the hospital for 5-7 days if you have a minor head injury, much less a serious injury. So the person you hit misses 3-4 weeks of work due to a surgery that was required because of the accident, and guess what else…. Yep, they don’t even have health insurance to take care of the medical bills. Before you know it, after medical bills and loss of wages this person’s attorney is generously asking for 6 figures to help restore his/her client and take care of the incoming bills. You better hope that you don’t have only $100k of liability coverage because if the settlement is anymore than that, you will be required to flip the bill. So, you’re probably wondering what is going to happen if you don’t even have that much money. Through the legal system the courts can decide if this injured person is entitled to the funds in your 401k or IRA or even the equity in your home. Another asset a lot of people don’t think of is your ability to earn an income. Wage garnishment is a harsh reality for a lot of people who did not have adequate coverage when it was so desperately needed.

Consider the cost difference between $100,000 of liability and $300,000, it is very minimal. I typically recommend to my clients to carry at least $500,000 of liability, the more liability coverage you have the cheaper it actually is per $1000 of coverage. So the next time you are looking to lower your auto insurance premium, don’t sacrifice your coverage.

Break Out Your Umbrella

Umbrella policies are definitely the most underestimated insurance product out there on the market. I don’t know of too many agents who recommend them on a regular basis and I know of even fewer people who have one. What is an umbrella policy you ask? I explain it to my clients as being an extension to the liability limits you already have in place on your current insurance policies, namely your auto and home insurance. Let’s say that you are in a severe auto accident and are found liable for hundreds of thousands of dollars in medical bills for 2-3 people. Once a settlement is reached in court they will require the insurance company to pay out according to the liability limits in place on the policy. If those limits are not enough to pay the settlement you will be held responsible to come up with the remainder of the balance. However, those who have an umbrella policy will be able to lean on the umbrella to take care of the short fall. It is very rare for an occasion to arise that would require your umbrella coverage to be utilized, but the fact is that there are indeed reasons to have one (especially if there is a teenage driver living with you). For example, I found this article in the “The New York Times” (http://www.nytimes.com/2008/03/18/business/businessspecial3/18insure.html?_r=1&pagewanted=2&ref=businessspecial3)

“One of Mr. Cox’s clients crashed into the rear of a car on a slick highway. A woman and a child were critically injured. After two years of litigation, his client settled the lawsuit for more than $5 million. The client had $15 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella,” Mr. Cox said, “they would have been completely wiped out.”

Because of how seldom umbrella policies are actually used to pay out on a claim, they are very affordable. Your average 2 car & 1 home family can expect to pay anywhere from $175 - $250 a year for a $1 million umbrella, the more ‘millions’ you purchase the cheaper it is per million dollars of coverage.

Talk to your insurance agent today if you don’t have an umbrella. Ask him/her to give you a quote and find out if they can break it down to a monthly payment with your auto insurance because it’s definitely worth the extra $15 a month.