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Automobile Insurance: The Different Coverages

Liability Insurance

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Liability insurance covers in case you as the owner of the car are liable to someone not in your car for damage caused by the driver of your car.

There are two types of liability coverage: "Bodily-Injury" Liability and "Property Damage" Liability.

  • Bodily Injury Liability: If someone not riding in your car is injured in an automobile accident, and the driver of your car is found to be at fault, bodily-injury liability coverage will pay for the injured person's medical treatments, rehabilitation, and other loss.
  • Property Damage Liability: This coverage pays for damage to property caused by your automobile when the driver is at fault.

Limits: Limits refers to the amount of coverage available for each accident. The two types of limits are "split limits" and "single" or "combined" limits.

Split Limits: Most auto policies use "split limits". An example is "50,000/250,000/50,000." Written this way:

  • The first number is the maximum amount the insurance company will pay for bodily injury to any one person.
  • The second number applies to the amount that will be paid to all injured people in total.
  • The third number is the amount the policy will pay for property damage.

Single Limit (also known as "Combined Limit"): Another type of liability coverage limit is a "single" limit. For example, if a limit is stated in the policy as $300,000, this would be the maximum paid for all liability claims per accident.

Everyone should have liability coverage, and most states mandate it.

The amount of liability coverage you need varies with your net worth and your income.

There is no limit to the amount for which you can be liable to other people.

Some people think that just because they don't own anything they can't suffer losses. This isn't true: your future income can be attached to satisfy an award granted to someone who sues you.

Bodily Injury:

  • If your net worth and income are low: If you don't own or earn much, standard advice is you might be okay with the minimum amounts of bodily-injury and property-damage liability coverage required by your state. However, we suggest that you at least look at liability limits of at least $500,000. If you can afford it, consider $1,000,000. The difference in premium between the two limits is generally minimal, especially compared to the possible consequences.
  • If you have more assets or a higher income: If you have substantial assets or income, you should have at least enough bodily-injury liability to protect all of your assets in case someone sues you. If your assets exceed the maximum amount of automobile liability insurance you can obtain, or if you want a higher limit but the company you want to work with doesn't offer it, consider an umbrella policy. Your bodily injury limit should be at least $1,000,000.
  • If the amount of your assets and/or income change suddenly, review the amount of your automobile liability coverage to make sure that it is adequate, but not excessive. For example, as a person with [insertcondition], you might go on disability, return to work, or receive proceeds from a sale of a life insurance policy (a viatical settlement).

Property Damage Liability:

Remember that property-damage liability coverage pays for the cost of damage you cause to another person's vehicle. While states typically only require $10,000 or $25,000, it is preferable to get coverage closer to $100,000. The cost differential is not likely to be that great -- but with cars getting more and more expensive, you're better off at the higher amount.


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