Quora.com is a web site where you can ask a question about anything and get an answer. The responder may be a Nobel prize winner or a blithering idiot. I sometimes answer P&C insurance questions. Since I have no Nobel prize, I’ll leave it to you to figure out where I lie along the knowledge spectrum mentioned above. Today, I received this question:
How much bodily injury protection should you carry on your auto insurance policy? Should it be based on personal assets?
The following is based on my response on Quora….
As a ballpark number, consider basing it on at least two things, along with a third consideration.
- Assets you currently have plus any non-income-related assets you anticipate acquiring in the next 10–20 years, plus
- At least 25% of your expected income over the next 10–20 years.
The third consideration is a moral or ethical one. If you negligently kill or critically injure someone, shouldn’t you have a social responsibility to indemnify them at least financially? Most people don’t have the assets or income to do this and that’s the function of insurance.
In seminars for years, I’ve told many stories about families ruined financially. One was a very upper middle class family whose teenage son ran a stop sign and struck a mini-van, killing the driver and her unborn child and transforming her young daughter into a quadriplegic. This left her husband to care for his daughter. To make a long story short, the responsible family had available liability limits of $60,000 and lost almost everything. I’ll return to this story in a moment.
Two other points. First, you can be sued for nonauto acts as well. For that reason, you don’t buy higher auto liability limits, you buy a personal umbrella policy that provides broader coverage and limits above other insurance policies you have such as auto, homeowners, and boat. The coverage is also usually cheaper when bought this way.
BTW, renters may have a greater need for an umbrella policy than home owners because they occupy a structure owned by someone else and/or they’re one of many units in a larger building that they could damage, not to mention potentially injuring or killing other occupants. For a story that illustrates this point, read my blog post “Who Needs an Umbrella Policy?”
The second point is that insurance is not a commodity differentiated only by price. There are often dramatic differences in coverage between similar policies at the contract language level (e.g., exclusions), as well as variations in the restrictiveness of insurance company claim practices. In the example I gave above, the family that lost almost everything actually had higher liability limits but their policies had an exclusion which, again to make a long story short, resulted in only $60K of coverage being available.
I recommend that consumers get a good local insurance agent who will assist them in identifying YOUR unique exposures to loss, matching them with the right insurance products, then advocating on your behalf, if necessary, at claim time. Here are 5 questions you can ask your current or prospective agent:
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