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Insurance - Head Matters


6. Auto Insurance

a. Automobile Liability Insurance

Almost every state requires you to have auto liability insurance. Insurance exists to protect your assets. Trying to see how little you can get can be very shortsighted and dangerous. The insurance industry and consumer groups generally recommend a minimum of $100,000 of bodily injury protection per person and $300,000 per accident since accidents may cost far more than the minimum limits mandated by most states.

If you've financed your car through a lease or a car loan, your lender will likely require comprehensive and collision insurance as part of the agreement.

There are 2 primary types of auto liability insurance:

  • Bodily Injury Liability
  • Property Damage Liability

Important things to keep in mind when selecting your liability insurance  limits

If you select limits that are too low, you could be putting yourself at risk financially. For example, if either you or a driver covered by your policy cause a serious accident where damages exceed your limits, you will be held responsible for the amount above your limits. To make that payment, you could be forced to sell property, savings, and other assets, or your future earnings could be paid to the other person. By purchasing liability limits to account for both your current assets and future net worth, you can help protect yourself against this risk. Also remember that if you’re responsible for an accident your liability insurance will only cover the other car up to the limits chosen on the policy. You will need to purchase additional insurance, such as collision insurance, in order to insure your own property in the event of an accident that is your fault. If an accident is not your fault, the other driver's liability insurance should cover your damages. 

Bodily injury liability

Liability means legal responsibility. Put this together with bodily injury, and it means that this coverage pays off when the insured has caused an accident and people require care, such as hospitalization, as a result.

This coverage applies to people in other cars and in the insured’s car, unless they are members of the insured’s immediate family (spouse, children and siblings). The coverage is stated in terms of maximum payouts per person and accident: 50/100 means a maximum of $50,000 for each injured person and $100,000 for each accident. Many states require a minimum for this coverage—such as 20/40 ($20,000 per injured person, $40,000 for each accident)—that each driver must have to register a car or get license plates. If this minimum does not cover all of the costs from the accident, the additional amount may be paid by the person responsible for the accident. That’s why some people carry much more than the required minimum coverage, especially since the additional coverage is not that expensive. You may want to rely on your insurance agent to guide you about the level of coverage you should purchase.

Property damage liability

This coverage provides financial protection when the insured causes an accident that damages another person’s property such as a car or a fence. Many states require a minimum amount of property-damage liability coverage, and many experts suggest a minimum of $25,000 because of the current value of vehicles. Since property-damage liability coverage is relatively inexpensive, it is a good idea to have $25,000 to $50,000 worth.

Insurance companies have a special way of expressing liability coverages: 100/300/25 means that the policy provides a maximum of $100,000 for each injured person, $300,000 for each accident and $25,000 for property damage.

It is important for every driver to have at least the bodily-injury liability and property-damage liability coverages. Why? Because the driver can suffer the highest losses if he or she causes an accident in which someone else is injured or something other than the driver’s property is damaged.

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