Financial Friday- Insurance: What’s the Right Amount?

*This was posted last Friday at Denver Parent and now re-posted here.

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.

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 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.  In auto insurance, here are the different 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.

1.  Bodily Injury Liability Coverage protects you from damage you may cause in an accident.  It consists of bodily injury liability and property damage liability.  Bodily Injury Liability 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 offerred 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, and there are medical conditions or injuries, 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– This 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.  It is generally the medical payments and personal liability which needs 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 and yourself.  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 increases, the different coverages offerred may change as well so call your insurance company.

Next week, I will cover what you need to do in the meantime — we do not plan accidents and we certainly do not expect to get into one but if we do, it is 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.

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