Why Your Car Insurance Liability Coverage is Likely Too Low

The amount of car insurance liability coverage you need can be a very complicated decision. Before even beginning to discuss the amount of coverage you need, you must understand exactly what liability coverage is. There are two overall types of liability coverage.

Types of Car Insurance Liability Coverage

  1. Property Liability Coverage
  2. Injury Liability Coverage

Let’s define these both below.

1. Property Liability Coverage

This coverage reimburses someone if you damage their property. For example, if you cause an accident that totals someone’s car then this coverage would kick-in to buy that person a new car.

Typically, the property liability coverage you buy is per accident. For example, if you get in a multi-car accident and total 3 cars each worth $20k you would need to have a $60k policy to breakeven. In this example a $20k policy would be too low. In an auto accident, the amount of property damage is typically much less than the cost of injuries. This is why property liability limits are typically lower than injury liability limits.

2. Injury Liability Coverage

Sometimes called bodily injury, this coverage reimburses someone you’ve injured for their medical bills. For example, if you get an accident and the person you hit needs to be transported to the hospital this coverage would kick-in to reimburse their medical bills. Particularly in the US, these medical costs can be significantly more expensive than property damage.

Unlike property liability coverage, injury liability limits are typically given per person and per accident. For example, consider a policy with a $100k per person, $300k per accident limit. If you hit someone who needs $200k in medical expenses, your coverage would not be enough.

What car liability coverage am I required to buy?

Now that we have defined car insurance liability coverages, let’s dive into what limits you will need. The best place to start is with state minimums. Nearly every state requires drivers to have some level of liability insurance, called “state minimums”. The reason behind why these minimums exist is beyond the scope of this article, however, you must ensure that you at least have the minimum insurance your state requires. Without this minimum level of insurance you are not driving legally!

Unfortunately, the amount of liability insurance you will need – and the type – can vary dramatically state by state. State minimums are also constantly being updated by regulatory authorities and can change often. State minimums vary by state, but there are numerous sites which publish a list of minimums. NerdWallet keeps an up to date chart (screenshot below) that can be a great starting point.

State Minimum Car Insurance Liability Coverage Chart
Screenshot of NerdWallet’s easy to use state minimum chart.

Are the state required coverages enough for me?

No! State minimum liability limits are too low for nearly every driver. For example, in Florida, state minimums require a driver to only purchase $10,000 worth of property liability insurance, but the average cost of a new car is ~$50,000! This means if you get in a crash in Florida – and you only have state minimum insurance – you could be out of pocket up to $40,000 just to replace their car! And this example, does not even consider the additional costs of medical bills or replacing your own car!

Unfortunately, if you have state minimum insurance and get into a car accident, you will likely need to spend a significant amount of money to reimburse the person you hit. And, in some cases where medical or property expenses are extensive, you may even consider bankruptcy. State minimums should not be seen as an acceptable standard of insurance!

Got it! State minimum insurance is not enough- so then how much do I need?

The rule of thumb in the insurance industry is that you should base your limit on your net worth (i.e. if your net worth is $100k, you should have $100k of insurance coverage). However, this rule-of-thumb is a bad approximation and misses the point of this coverage.

As an example, consider the case where you have $100k in savings and receive the above advice. You follow the rule-of-thumb and decide to purchase $100k in car insurance liability coverage. Unfortunately, you cause an accident one day while driving to work. The person you hit is badly injured and requires a surgery costing $500k. In this example, you would have quickly exhausted your insurance coverage and your savings! Now you are broke and still owe several thousands to the person you hit… clearly this advice failed you! This example is unfortunately very real and an example of how the vast majority of Americans are likely underinsured.

Although most Americans could benefit from increased insurance coverage, realistically the cost of higher limit car insurance is expensive. There is no rule for an adequate level of coverage, but you should balance the monthly cost you can afford with your risk tolerance. For example, if you have dependents or a significant amount of assets you could lose in a lawsuit, you should consider increasing your liability coverage to protect yourself.

Can I have too much auto liability coverage?

Yes! At a certain limit it is typically more cost effective to purchase an umbrella policy instead of continuing to increase your auto coverage. You should speak with a broker or check the terms of your umbrella policy, but typical upper limits are below:

Injury Liability Limits$100k per person / $300k per accident
Property Liability Limits$100k
If you require car insurance liability coverage beyond these limits consider using an umbrella insurance policy.

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