How To Calculate Auto Insurance Coverage

Auto liability coverage pays for injury and property damage you cause to others. It is the part of a car policy that protects your finances rather than your car, and it is the only part most states require. Bodily injury pays for medical costs and lost wages of people you injure; property damage pays for the vehicles and property you damage.

Every state sets minimum liability limits, usually expressed as three numbers such as 25,000 per person, 50,000 per accident and 25,000 for property damage. These minimums are a legal floor chosen to be affordable, not adequate. A serious accident can produce medical bills and lost earnings far beyond them in an instant.

When a claim exceeds your liability limit, you are personally responsible for the excess. A court judgment can attach your savings, your investments, your home equity and, in many jurisdictions, a portion of your future wages through garnishment. The purpose of higher limits is to put a wall between a bad accident and your entire financial life.

The standard way to size liability cover is to protect what a claimant could reach. Add up your liquid assets, your home equity and other property, then add several years of income, because future earnings can be garnished. A common rule of thumb is assets plus three to five years of income.

Dependants raise the stakes. If others rely on your income, a judgment that reduces your earnings affects them too, so it is reasonable to add an allowance for each dependant on top of the income figure. The goal is a limit that a realistic worst-case claim cannot exceed.

Umbrella policies are the efficient way to buy very high limits. Once your auto liability reaches the level your insurer sells, a personal umbrella policy adds a further one to five million of cover across auto, home and other liabilities for a modest annual premium. It is usually far cheaper per dollar of cover than raising the auto limit alone.

Uninsured and underinsured motorist cover is the mirror image. It pays you when the at-fault driver has no insurance or too little to cover your injuries. Roughly one driver in eight is uninsured nationally, so this cover protects you against someone else's inadequate limits.

Collision and comprehensive cover protect your own vehicle rather than other people. Collision pays to repair or replace your car after a crash you cause; comprehensive covers theft, fire, weather and vandalism. These are optional in most states and are often dropped once a car's value falls below the cost of the premiums.

Medical payments or personal injury protection covers treatment for you and your passengers regardless of fault. In no-fault states this cover is mandatory and can also replace lost wages and pay for essential services while you recover.

The right limits depend on what you own. A driver with few assets and little income beyond a protected retirement account has less to lose and may reasonably carry lower limits. A homeowner with a healthy salary and investments has far more exposed and should carry correspondingly higher limits.

Cost is not proportional to cover. Raising liability limits from the state minimum to several hundred thousand typically adds only a small amount to the annual premium, because the insurer's risk rises slowly across the moderate range. The expensive jumps come at very high limits, which is where an umbrella becomes the better buy.

Review the limits whenever your circumstances change. Buying a home, a pay rise, a marriage, a new baby or a move to a different state all change what is exposed or what is required. A limit set years ago may no longer protect what you now have.

Finally, remember that liability limits are per accident, not per lifetime, and they reset each policy period. The figure you choose is the ceiling on the insurer's payout for any single covered event, so it should be large enough that a serious claim does not spill over into your own assets.