How much liability coverage do I need for my car insurance?

Question

My auto insurance policy is up for renewal soon, and I want to make sure I have the right amount of liability insurance.

Currently we (my husband and I) have liability coverage for $100,000 per person/$300,000 per incident. A general rule of thumb according to several sites, like this one, is:

Make sure you’re covered for an amount equal to the total value of
  your assets (Add up the dollar values of your house, your car, savings
  and investments).

When I add up our total assets (savings plus the equity in our house) I get about $110,000. If I include retirement savings that goes up to $150,000. That puts me right above the $100,000 per person limit but well below $300,000 per incident limit.

Is a $100,000/$300,000 policy adequate coverage or should we be bump up to the next coverage level ($250,000/$500,000)?

Pete B. · Accepted Answer

This is a great question and is an area that many people have difficulty with as they start building assets.  Judging by the stats you state, you and your husband are well on your way to becoming every day millionaires.  The people that are talked about in the book A Millionaire Next Door.  Good work, keep it up!

The first thing you need to do is to figure your net worth.  That is assets minus liabilities.  If you own your cars out right (no payments) then it would add to your ~250K total.

Your homeowners insurance adds about another 300k to your liability, but please check your policy.  This is general liability coverage because the home owners insurance protects not only you, but also the bank.

Once your net worth gets around the 600k to 700k mark you need to start thinking about an umbrella policy.  They run about 350 per year to add another 1 million in general liability.  That is pretty cheap for a lot of protection.  You want to do this a bit sooner than later as it takes a while to get it all in place.

The conclusion is that you are good for now, but check on your home owners insurance policy for your liability limits.  Carrying 600K worth is plenty for you at this stage of the game and is not very expensive.

TomTom · Answer

That rule of thumb is dumb. Seriously. What if you by accident hit a bus of people that need half a year of rehabilitation? You end up not only causing damage by not paying, you also end up loosing everything. Because your liability is NOT limited to your assets. You own 200k, have 200k insurance, damage is a million - the 200k insurance will not protect your 200k in assets. Done.

You should bump up to a sensible coverage. What is sensible? Ah, here we go.

EU minimum liability is in millions. Literally. Because yes, freak accidents happen and are EXPENSIVE. And that is in an area with way cheaper health care than the USA. Given how low premiums are (as per comment by user71659 - you are grossly neglecting not using the maximum.

How much liability coverage do I need for my car insurance?

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