UPDATED: Aug 5, 2013
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In order to operate a motor vehicle on a public road in the United States, a driver must have a minimum level of liability insurance. Each State has its own requirement for how much insurance must be in place, but one thing is similar: State minimum car insurance is not enough to protect you.
Minimum Liability Insurance Explained
Car liability insurance is the part of a policy which covers drivers and property outside of your own car. This can include occupants of another car, the other car itself, and even a mailbox or light pole. It is important to note that most liability policies do not cover occupants of your car if you are found at fault.
The way in which liability insurance requirements are typically displayed is this:
What these numbers mean:
Injury or death to one person – The first number listed above stands for the total amount an insurance company will pay in the event of an injury or death per individual person. This will cover medical costs or liability costs if the person or family sues the policyholder. In the example above, 25 represents $25,000.
Injury or death to more than one person – The second number also represents the amount an insurance company will pay for injury or death, but this is the aggregate total for all people involved in the accident. That means no matter how many are injured, the company will only pay up to the listed total. The 50 above represents $50,000.
Damage to property – The final number stands for the maximum amount an insurance company will pay out for damages to physical property. This can include other cars, buildings, utility poles, etc. The 10 stands for $10,000.
Car insurance is governed at the State level, so all 50 of them are in charge for setting minimum liability amounts each driver must have to lawfully drive on the roads. Some States have set reasonable minimums that provide a decent level of protection for common accidents, while other States have set their requirements so low that just about any type of accident could potentially go over the insurance amount.
Here are a couple examples:
New York – 25/50/10
New York drivers must carry $25,000 individual injury/death, $50,000 aggregate injury/death, and $10,000 of property damage. This is a good start, and puts them on the higher end for State requirements. However, there is still a lot of exposure for drivers involved in something more than a fender bender.
California – 15/30/5
California’s minimum liability coverage requirement is even lower than New York. They only require $15,000 per individual, $30,000 aggregate, and $5,000 for property. Drivers carrying California State minimum insurance are at even greater risk of being personally liable in an accident.
Why State Minimum Liability Insurance is Too Low
Now we will take a look at a hypothetical situation to see what happens when a driver with State minimum liability insurance is involved in a medium-sized accident.
Suzy lives in California and has an auto insurance policy with the minimum coverage required by law. On her way home from work, she runs through a red light and hits a late-model minivan with a family of 4 inside. The minivan is totaled and each person in the other car has to spend a night in the hospital.
The minivan was valued at $20,000 at the time of the accident, and each passenger had $10,000 worth of medical bills.
Luckily Suzy’s insurance company covers up to $15,000 per individual, so the $10,000 each fits into her coverage. Unfortunately, her insurance company will only pay $30,000 total, which leaves the remaining $10,000 up to her. Her policy also has property damage to help pay for the car, but only $5,000 worth. The other $15,000 falls back on her shoulders.
In the end, Suzy’s insurance company will pay $35,000, but she is responsible for the remaining $25,000.
This potentially life-changing financial blow could easily have been avoided by carrying more liability insurance. In this example, the accident was moderate, but could have been a lot worse. If someone sustained severe injuries or died, the liability costs could run in the hundreds of thousands. Or if the car was a new SUV valued at $50,000, the cost would have skyrocketed.
How Much Liability Insurance Do You Need?
Now that you know State minimums are not enough, the next logical question is:
How much liability insurance is enough?
There is not a one-size-fits-all when it comes to insurance, because every individual and family has their own unique set of circumstances. There are, however, general guidelines that can put you on the right path. Most experts agree that 50/100/25 should be the bare minimum for liability insurance. Luckily there are a few States that have this as their requirement already.
The truth is I would never get caught driving around with anything less than 100/300/100. I personally carry more liability insurance than that, but this would be my absolute minimum.
What about the increased cost of the premium?
Many consumers are unaware how affordable increased liability coverage actually is. Just because a policy provides four times the coverage doesn’t mean it will cost four times as much.
As of the date of this article, a 30 year old married couple with a safe driving record and living in California could increase their liability coverage through Esurance from State minimums to 100/300/100 for only $13 more dollars a month. That $160 a year could be the difference between a bump in the road and being financially ruined.