Most people look at their car insurance as just something that the government says you must have, and look at it as just a hidden government tax. In a way it is, but it is also much more than that.
Why the government forces people to buy car insurance.
When you take your car on a public road you are responsible for any damage you do with your car. Insurance is one way that you can prove you have the means to pay for some of the damage done if you are in an accident.
Most States also allow someone to show financial responsibility by having a trust set up that covers at least the state minimum in an account that they can’t touch unless they have an accident. For the vast majority of Americans this is not a realist option.
The biggest part of your car insurance is to care for another person if you get in an accident.
If you were to make a minor mistake on the road and hit someone, it is natural that you should be responsible for the costs that they incur because of that mistake. If the accident is minor their costs would just be fixing their car, which under most state minimums insurance will cover the costs of all but the most expensive cars.
If the person is injured you’ll be responsible for their immediate medical bills, which could easily reach the limits of your insurance. If you are insured for $20,000 bodily injury an accident severe enough to send the other person to hospital overnight would exhaust your coverage, and you would be responsible for the rest of the bill.
If the accident was a little worse, and the person suffered an injury that made them unable to do everything they could before, then you would be financially liable to make them whole or whatever it takes to get their life back to how it was before the accident. This could easily run into the $100’s of thousands of dollars. You’re state minimum coverage will not cover that and you can be held responsible for the rest.
Finally, If the other person dies in the accident their family will be out the money and time contribution that person gave to their family. Even if the person was a complete bum they contribute some financial benefit to their family. Let’s say they were the unemployed member of the family. They still contribute by doing the housework, taking care of the kids, shopping, cooking, fixing things around the house.
To demean this person further let’s say these activities are only worth $10 an hour and can be done in 20 hours a week. That’s $200 a week for the rest of their lives. So if they were 40 years old that’s a contribution of $312,000 that you would be responsible for. That is about as low a figure you can put on a human life, most people contribute much more to their families.
As the responsible party in the accident you would be liable for these costs to the family. Without enough insurance they injured party can go after you for these costs.
Depending on the state you live in they can take your liquid assets, savings, investments, ect. The equity you have in your house, and in some states even garnish your wages. So you can easily have to start over building your financial life, with a substantial drop in income, all because of one minor mistake behind the wheel.
With this in mind how much insurance is enough?
First look at your net worth, with your savings, investments and equity in your home and up to 25% of your wages for the next 10 years. How much could you lose?
If you are 18 and fresh out of high school probably not much, but as you grow older you accumulate more things to protect, like a house, and higher income. So you should increase your insurance as your net worth increases.
So if you make $40,000 a year and own a $100,000 home, and have $50,000 dollars in investments then you could lose up to $250,000.
If you only have minimum coverage, say $25,000, the injured party will have two options they can take a quick settlement for $25,000 or take you to court and get the full $250,000. Unless you hit someone who’s family is complete morons it’s pretty obvious which option they will take.
If you have $250,000 in coverage, the injured party will have the option of getting a quick settlement of $250,000 or a long court battle to get $250,000. Again if the family has any sense it is pretty obvious which option they will take.
Finally you should look at your own moral responsibility, if you are a decent person who feels they should try to fix the damage caused by your mistakes you might want to look at getting more coverage than what your losses could be out of concern for the person or family who could be damaged as a result of a mistake you make on the road.
Disclaimer:D Nelson holds his Property and Causality Insurance license in the Commonwealth of Kentucky. At the time of this writing he does not represent any Insurance Company. The purpose of this article is to give an overview of bodily injury insurance and not to be taken as advise as to a course of action. You should consult your state laws and talk to your insurance agent as to what coverage is best for you.
