Liability Insurance: How Much Coverage Do You Need?

If you own a car, you probably have had to decide how much liability insurance you want to carry when filling out an insurance application.  Most of us breeze through that section without really giving it much thought.  But if you are found legally liable for causing damage to someone’s person or property, and there is a monetary judgment against you, then you might just find yourself in a pickle if you didn’t purchase enough insurance to protect your assets.

What is Liability Insurance?
Liability insurance is protection against the risk that you will injure or damage someone or someone’s property.  You can purchase it as part of your automobile policy (in fact, most states require it).  Under your auto policy, liability insurance will pay for damage you cause with your car to someone else’s car and to the occupants of that car.  It also pays for a lawyer to defend you if you are sued as a result of an auto accident.  Bodily Injury Liability Insurance is the coverage that pays for claims and lawsuits by people that have been hurt as a result of an accident that you've caused; Property Damage Liability Insurance is the coverage pays for claims and lawsuits by people whose property was damaged as a result of an accident that you caused.

All states that require you to purchase auto liability insurance set out minimum coverages for both bodily injury and property damage insurance.   For example, in a state with minimum limits of $30,000, you might see it written something like this: 30/60/10 which means you have $30,000 coverage for one injured person, $60,000 for all injured persons combined, and $10,000 coverage for all property that was damaged.  Okay, so if that’s the minimum in your state, is that the amount you should buy?  Maybe.  But maybe not.

How do you know how much to buy?
Even though each state has minimum (or no) requirements for liability coverage, it is probably in your best interest to purchase higher limits. If someone else is injured and you're at fault, the minimum liability coverage may not cover their medical and other expenses, in which case their attorney will most likely come after your personal assets. It is generally recommended that you purchase 100/300 limits of liability coverage for bodily injuries, and $25K coverage for property damage to be safe. However, if your personal assets don't amount to much (you don't own a home, live from paycheck to paycheck), you don't have a whole lot for them to bother about, so the minimum requirements might actually suit you, not to mention save you some much-needed cash because the premium is lower.  So you can see that how much coverage you need is a function of what assets you have to protect. If you make $30,000 a year, rent your apartment, and have little savings, $30,000/$60,000 should suffice. But if you make, say, over $75,000 a year, own a house worth $150,000 and have $40,000 in mutual funds, it is best to consider at least $100,000/$300,000 of coverage.

Other options to protect your assets
If you have substantial assets, you need substantial coverage.  You don’t have to have it all in one policy, however.  You can have limits of 100/300 on your auto policy, and then spend about another $150 to $300 for a $1 million umbrella policy, which covers you against all manner of liability claims—not just auto. It will pick up where your liability coverage leaves off.   So if you break an expensive item at your friend’s mansion and your homeowner’s insurance isn’t sufficient to cover it, your umbrella policy will step in and make up the difference.  Should you want still more coverage, the cost for an additional $1 million in coverage is minimal: It is typically $75 to increase your coverage to $2 million, and then $50 for each million after that, according to the Insurance Information Institute.  The umbrella policy may turn out to be a less expensive option than simply raising your liability limits on your auto policy.  Speak to your insurance agent and compare the costs to see what works best for you.

If you are very wealthy, you might need to protect your assets even beyond what the insurance industry can do for you by employing specific asset protection techniques such as various types of estate planning tools, retirement plans, life insurance contracts, trusts, limited partnerships, and even offshore accounts. Consult with a qualified and experienced estate-planning attorney or financial advisor to decide the safest and most productive method of asset protection for you.