How Much Liability Insurance Do I Need?

Carrying auto liability insurance is mandated by law in most states. However, state-required liability coverage levels likely won’t provide all the protection you need. Carrying too little liability insurance can be a recipe for financial disaster if you’re at fault for a traffic accident.

Liability insurance is intended to protect your assets. When you’re liable for property damages and injuries in an accident, your liability coverage can help pay the costs. Insurance companies allow you to increase liability coverages above state-required levels, and they offer additional liability insurance products that can beef up your asset protection.

What Is Auto Liability Insurance? 

Auto liability coverage helps protect your assets when you cause an accident. Car insurance policies include two types of liability coverage:

• Bodily injury liability: If you’re at fault for an accident that causes injuries to the other driver or their passengers, bodily injury liability coverage will help pay their medical expenses.
• Property damage liability: This type of coverage helps pay to repair or replace another person’s property when you’re at fault for an accident. Property damage liability covers a wide range of property, from another driver’s automobile to a homeowner’s fence.

Suppose you rear-end another car at an intersection, damaging the other vehicle’s bumper and shattering its back window. Your property damage liability coverage will help pay to replace the mangled bumper and broken window. If the other driver or their passengers sustain injuries, your bodily injury liability coverage will help pay their medical bills.

State Liability Requirements

Most states require all drivers to carry minimum levels of bodily injury liability and property damage liability coverages. You’ll likely notice your liability coverages expressed as three numbers, separated by forward slashes, such as 30/60/25. This example indicates the following coverages:

• $30,000 in bodily injury coverage per person
• $60,000 in bodily injury coverage per accident
• $25,000 in property damage coverage per accident

The amount you’re required to purchase will depend on where you live. For example, California requires motorists to carry a minimum of 15/30/5 in liability coverage, while Texas requires 30/60/25.

Liability coverage only pays up to the limits of coverage you purchase. If costs exceed your policy’s limits, you could face unexpected out-of-pocket costs. For example, if another driver racks up $20,000 in medical bills due to an accident you caused and you only carry $15,000 in bodily injury coverage, you’re on the hook for the remaining $5,000.

It’s important to know your state’s minimum auto insurance requirements. If you’re unsure, ask an insurance agent.

The Costs of Being Underinsured

State minimum liability insurance requirements might not adequately protect your assets. According to the U.S. Centers for Medicare and Medicaid Services, a one-week hospital stay costs an average of $70,000. If more than one person sustains an injury, medical costs can skyrocket.

When someone sustains a serious injury in an auto accident, the economic costs can exceed medical bills and may include administrative expenses and lost wages. The average economic cost of a fatality ran more than $1.7 million in 2019, and the impact of a disabling accident cost nearly $100,000, according to the National Safety Council.

For example, a 2022 Honda CR-V, one of the most popular vehicles on the road, starts at around $25,750. Many other popular makes and models come with even higher sticker prices.

Consider the economic impact a California driver would face if they only carried the state-required 15/30/5 liability coverage. If they totaled another motorist’s 2022 Honda CR-V, their policy’s $5,000 in personal property liability coverage would fall far short of the replacement cost. If the other driver sustains serious injuries, the underinsured car owner could face asset losses in the tens of thousands of dollars.

How To Determine How Much Coverage You Need

An auto accident can lead to more than just injuries and property losses. If you’re at fault for a crash, the other driver might sue you for damages or pain and suffering. Financial and insurance experts recommend that you carry at least:

• $100,000 in bodily injury liability coverage per person
• $300,000 in bodily injury liability coverage per accident
• $100,000 in property damage liability per accident

These coverage levels should provide adequate protection for many drivers. However, you should carry enough liability insurance to protect all your assets. If you have a net worth of around $250,000, 100/300/100 in liability coverage is probably all you need. However, folks with a high net worth might need greater protection.

A single umbrella insurance policy can provide liability protection for your car, home, and recreational vehicles. Umbrella policies kick in when you exhaust the coverage of a primary policy, such as auto liability insurance.

For example, if you cause a traffic accident that causes $50,000 in property damage, and only carry $10,000 in property damage liability, your car insurance will pay the first $10,000 and your umbrella insurance would pick up the remaining $40,000.

The Bottom Line

Skimping on auto liability coverage may save you a few dollars on your insurance premium, but it could lead to financial disaster if you’re at fault for an accident.

When shopping for car insurance, determine the amount of liability coverage you’ll need to protect all your assets. If you decide to buy only state-required liability coverage levels, consider purchasing an affordable umbrella insurance policy, which can provide protections for your automobile and home.

Frequently Asked Questions (FAQs)