Cutting Your Liability Car Insurance To Save Money Could Cost You Big

7 years ago
Low angle view of the front part of a car after an accident

We are a nation of cars. Americans drive an average of 12,000 to 15,000 miles a year. With that mileage comes many opportunities to be involved in traffic collisions and accidents. That's why personal liability car insurance is required before you get on the road.

Auto liability insurance pays for claims when the driver is found to be at fault for an accident. The policy is frequently denoted as a series of three numbers, for example, 25/50/25 or 30/60/50. States have minimum liability coverage levels on the books, but the minimums are almost always too low to cover the cost of an average accident. California, with one of the lowest minimum requirement in the country, only requires 15/30/5. If you just opt for the minimum to save money, however, you may find that that decision will cost you hundreds of thousands of dollars down the road.

The first number is the bodily injury liability coverage per person in an accident. The second number is the liability coverage per accident, which is the upper bound on liability coverage, no matter how many people are in the car. If you hit a van full of passengers, you are out of luck and may be sued for the expenses exceeding your coverage. The third number is the liability for property damage to the not-at-fault driver's car or property.

So, let's say that Johnny has 50/100/50 coverage and accidentally hits another car carrying Jane and her friends Anne and Lola.

Scenario 1: Jane suffers $40,000 in personal injuries, Anne suffers $20,000, Lola walked away without a scratch on her, and Jane's car is totaled, which costs another $45,000. In this case, Johnny's insurance has covered him completely.

Scenario 2: If Lola suffered injuries to the tune of $50,000, then the insurance company will only pay out $100,000 to all three ladies, even though the total medical claims add up to $110,000. Johnny can be sued for that $10,000 that his insurance did not cover.

Just like you need an appropriate investing strategy to reach your investment goals, you need to have an insurance strategy to make sure you are adequately protected. When I first graduated college, I started with  25/50/25.  A few years later, I increased my car liability coverage to 50/100/50 ($50,000 per person, $100,000 per accident, $50,000 property). Then just a few weeks ago, I increased that again to 100/300/100 ($100,000 per person, $300,000 per ccident, $100,000 property). When I found out that the increased coverage will only cost me an extra $50 over 6 months, I decided to go for it.

In a recession, many drivers might be tempted to cut back their insurance coverage to save money, but for an extra $10 a month, you can buy up to a hundred thousand dollars in extra liability coverage. This may be prove invaluable if you were ever found to be at fault for an accident. (Imagine, for example, the level of expenses if you caused a collision with a BMW SUV carrying six passengers.)

If you have assets, a substantive level of insurance is needed to protect those assets. Even if you don't own stocks, houses, or cars, however, you could still be sued for wage garnishments. If you are in a career trajectory with high potential income, don't forget that your income-generating ability is also an asset to protect.

@WellHeeledBlog -- Savvy Living Through Personal Finance

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