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Dear Homeowner
I recently read an interesting article from Smartmoney.com regarding auto insurance. As I read through, I thought about a few questions that you, the customer, probably should ask yourself. This newsletter addresses questions such as choosing the right liability limits, when to remove collision coverage, and why you should consider an Umbrella policy.
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How Much Liability Insurance Do You Need?
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Looking to save premium dollars? Two tried and true ways to reduce your auto insurance premiums are to hike the deductible on your collision coverage and skimp on your liability coverage. Sometimes this can make sense, but often it's not worth the extra risk.
Bodily Injury Liability Coverage...How much should you carry? Bodily injury liability coverage compensates the driver of the other car and its passengers in the event you get into an accident. It also covers the passengers in your car. The main consideration here is protecting your assets against lawsuits that arise from auto accidents. It is also important to know that you can get sued even if the accident is not your fault.
Bodily injury liability is sold in standard increments that designate both how much coverage you have per person in an accident, with an additional limit per accident. For example, if you buy bodily injury worth $100,000/$300,000, each of the people you injured could be compensated $100,000, but only up to $300,000 per accident.
How much coverage you need is a function of what assets you have to protect. If you make $30,000 a year and rent your apartment, $50,000/$100,000 should suffice. But if you make more than $75,000 a year, own a house worth $150,000 and have $40,000 in mutual funds, you should consider at least $100,000/$300,000 of coverage. Here you can find a Net Worth Calculator which will help you estimate just how much coverage you should get.
How much you'll pay to increase your bodily injury liability coverage depends on several factors, including your age, marital status and driving record. It also depends on where you live. In areas where the frequency of bodily injury is higher, the cost to carry higher limits may be more expensive.
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When Should I Remove Collision/Comprehensive Coverage from My Policy?
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Collision reimburses you for the full cost of repairs or replacement of your car after an accident. Comprehensive covers you in the event your car falls victim to a natural disaster, vandalism or theft. With either coverage, the lower the deductible you choose, the more the policy will cost you. We recommend that you always choose the highest deductible you can afford ($1,000 is fine). After all, the purpose of insurance is to protect you against big losses, not to make you whole to the last dollar.
If you have an older car, you might drop this coverage altogether. Collision and comprehensive - which can account for 30% to 40% of your total premium - are cash-value coverages. That means if your car is damaged, the most you'll recoup is the Kelley Blue Book value, which declines precipitously as your car ages.
Here's a good rule of thumb: If the cost of your collision and comprehensive is more than 10% of your car's Blue Book value, it probably makes sense to drop these coverages and save a tidy sum. With most cars, you should approach this limit as the car turns five years old. Understand, however, that if you eliminate the coverages, you'll have to foot the repair bill if you get in an accident that's your fault, or if the car is totalled or stolen.
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Why Should I consider an Umbrella policy?
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You don't need to be a millionare to have a million dollars of liability exposure. If you have substantial assets ($250,000) and a steady job, your liability exposure is greater than most. $300,000 in bodily injury on your auto policy and $300,000 on the liability portion of your homeowners policy probably isn't enough coverage. Should you be held liable in an auto accident, or if someone is injured on your property, not only can your assets by taken but you future wages could also be garnished.
A $1 million umbrella policy generally cost between $150 to $300 for a full 12 months of coverage. This policy will cover you against all manner of liability claims. Should you want still more coverage, the cost for an additional $1 million in coverage is minimal: It's roughly $75 to increase your coverage to $2 million, and then $50 for each million after that, depending on various factors.
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