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How to Purchase the Right Amount of Mandatory Auto Insurance Coverage

Everybody knows that car insurance, in one form or another, is mandatory in all 50 states (and when we say “one form or another”, we’re looking at you, New Hampshire). Legally, you’re required to purchase enough coverage so that if you cause an accident, regardless of how severe it is, you had the financial means to take responsibility for your actions and compensate the injured parties. In the automotive insurance industry, this is known as liability insurance.

A “liability only” auto insurance policy is one of the most affordable policies you can possibly get – however, there are some very serious downsides to limiting yourself to such little coverage. Those include:

  • Third party and no fault claims. If the accident was the other driver’s fault, or the accident is deemed a “no fault” accident, then you are financially speaking up the creek without a paddle. Liability only pays out if you cause an accident, and the injured party comes after you for financial damages. You personally will not be compensated in any other situation.
  • Acts of nature. If your car gets dented in a hail storm, flooded in a hurricane, swallowed up into a sinkhole by a giant earthquake, burnt to a crisp and a wildfire, or struck by lightning and rendered end mobile, you will be 100% financially responsible for finding a new means of transportation. Your liability coverage will not protect you in these instances. Payouts on these claims come from your comprehensive coverage, which is optional on almost all car insurance policies.
  • Cosmetic damage From a collision. If your windshield cracks, if your bumper gets torn off, or any other physical damage happens to your vehicle as the result of a collision, your insurance will not pay out on any of these claims, either. these claims are paid out based on your aptly named Collision coverage. This is also an optional coverage and virtually every single car insurance policy.

Understanding the importance of liability insurance

Whether you’re trying to save money by purchasing liability only insurance, or whether you’re concerned about the financial repercussions of not having enough liability coverage, it’s important to grasp the idea of what exactly liability does, who receives liability claim payments, and how to calculate the exact amount of coverage that you need in order to stay financially secure.

Here’s the thing: if you have tens or even hundreds of thousands of dollars in personal, private assets that you don’t want seized and liquidated in the event that you cause a catastrophic accident, then you need to purchase as much liability insurance as you can afford. In the event that you do cause an accident that’s severely injures, permanently disables, or even results in the death of one or more individuals, you are going to a lot of people a lot of money. And if you are deemed legally at fault for all of those damages, you won’t have any choice in the matter – your house, any vehicles you own, and any other valuable property (jewelry, art, electronics, financial investments, et cetera) will be sold to whoever can pay the most money in order to compensate the victims of the accident.

Understanding the anatomy of liability coverage

Liability insurance coverage is split into two different categories: bodily injury, and property damage. beyond that, your bodily injury liability coverage splits even further into two different subcategories: the amount you pay per person in the event that you cause an accident, and the amount you pay total for a single at-fault accident.

If all of that sounds a little confusing, consider the following example: you’re driving home late at night during a very bad storm and accidentally run a red light. You end up T-boning a car that was driving through the intersection. There are 2 passengers in that car: a mother, and her small child. Everyone is alive, but their mother is seriously injured and her grand total and medical expenses comes out to $30,000. Her child on the other hand only has $21,000 in medical bills. And since you’re responsible for totaling her $25,000 car, your property damage liability coverage will pay for that too.

But here’s the catch: you live in Virginia, and you chose to only purchase the bare minimum liability requirement as mandated by state law. In Virginia, the mandatory State minimums only allow for a maximum of $25,000/$50,000 bodily injury liability, and $20,000 of property damage liability coverage. So in this scenario above, here’s how much you would owe with a bare minimum auto insurance policy:

  • Since your insurance only covers $25,000 worth of medical expenses per person in an accident, you will be responsible for $5,000 of the mother’s remaining medical bills.
  • Since you only have $20,000 of property damage liability coverage, the remaining $5,000 she needs to replace her vehicle will be coming out of your pocket.
  • While the child’s medical bills are with him the $25,000 coverage limit of your per person bodily injury coverage, it does exceed the $50,000 bodily injury liability coverage that your insurance company is willing to pay out per accident. That means that the child’s remaining $1,000 of medical bills will be your financial responsibility.

Now, let’s take a look at how much money you thought you were saving by purchasing a bare minimum liability only insurance policy. These are the average rates for Virginia drivers from various companies around the state for a liability only auto policy:

Average Monthly 25/50/20 Liability Premium Legend: Virginia Cincinnati Insurance ALFA State Farm Nationwide Encompass 10 20 30 40 50 60 70 80 90 100 110 $36 $39 $54 $74 $119

 
Here’s a graph of how much those same drivers in Virginia pay per month for an auto insurance policy that includes up to $100,000/$300,000 bodily injury liability and $100,000 property damage liability coverage:

Average Monthly 100/300/100 Liability Premium Legend: Virginia Cincinnati Insurance ALFA State Farm Nationwide Encompass 15 30 45 60 75 90 105 120 135 150 165 180 195 $100 $108 $142 $151 $196

 
It seems as though the average Virginia driver saves about $900 per year with the liability only policy as opposed to the driver who has a Sufficient amount of coverage. Over the course of five years, that savings would be $4,500. And over the course of 10 years, that savings would total $9,000. But as you can see, none of those numbers are even close to, let alone greater than, the $11,000 you would you would owe the injured family.

Purchasing higher amounts of liability coverage

The scenario above perfectly illustrates why it’s so important to buy a sufficient amount of liability coverage – both to protect your assets, and to adequately compensate people whose lives were turned upside down by an accident there was no fault of her own. Even if you don’t want all the optional bells and whistles of a truly comprehensive policy (such as comprehensive and collision coverage, roadside assistance, and more), you should still talk to your insurance agent about what the appropriate amount of liability coverage is for you. They will be more than happy to sit down with you, analyze your liquid assets, and help you decide on a number that can give you some financial peace of mind.

Most auto insurance companies are willing to sell you as much as $100k/$300k/$100k worth of liability coverage.This should be adequate for the average, middle-aged, suburban homeowner to protect himself and his family from financial ruin in the event of a catastrophic at-fault accident. But if you have more access to protect them that, then you should talk to your insurance agent about an umbrella policy. Umbrella policies are liability only, but they can extend and your coverage up to $1 million dollars or more. And, unlike bodily injury liability, there’s no caps on how much you pay per person or per accident; the full amount of your financial responsibility is pulled from that $1 million dollar pool.

We hope this article was helpful for any driver that wasn’t 100% sure about how their liability coverage worked before they started reading this page. We know that a lot of what you’ve read so far may seem a little heavy-handed, but nobody plans on getting into a serious accident. And they certainly never plan on being deemed at fault. But because you can never plan for the future, you need to get the best deal on your liability coverage from a top rated insurance agency in your area. And if you enter your ZIP code end of the quote generator below, we’ll show you exactly how to find it.

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