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In the course of adding myself to my girlfriend's renters insurance, it came to light that I still had 50k/100k/50k liability (50k individual, 100k total over accident, 50k property). This is naturally a hold over from 15 years ago when I was a new driver and had limited assets and income.

I am curious what the community thinks would be the trigger to up one's auto liability protection?

After speaking with the agent, she indicated that this liabilities protect assets from lawsuits, and from her understanding almost everything was a potential target: savings accounts, retirement accounts (IRA, ROTH, 401k), housing equity, physical assets, HSA's, and up to 30% of income in the state of Oregon.

The cost differential was much less than I had thought (on the order of $5/month), and my assets and income potential greatly exceed my protection. Is higher coverage as much of a slam dunk as I am thinking? Or am I missing something?

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I carry very high coverages because of the high likelihood that anyone else who might be involved will be under- or uninsured –  warren Dec 18 '12 at 4:38
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Auto insurance itself does not protect your assets. The $100k/300k amounts simply specify the maximum that the insurance company will pay out. If a lawsuit is won against you for a higher amount you will be on the hook for the remaining amount.

Source: "So if there is a judgment against you by one person for $100,000 and you have the minimum limits [as required by state law] of $15,000, you must pay the $85,000 difference."

At times you will want to increase your coverage to lower the risk of severe damage to your net worth. If you only have a net worth of $25k then having a $50k/100k policy is probably fine because there is a really low risk of crashing and losing a lawsuit for that in the first place, and you only have $25k that they could go after once insurance has paid out. (Although could they win a lawsuit for more than your net worth and you would have to pay it off in the future? You would have to really screw up to make a judge do that to you I think.) Also, if you were to total someone's $300k Ferrari you can bet they have under-insured motorist coverage on it for the full value of the car so the only scenario to really worry about is if you put someone in the hospital for a year.

If you have a net worth of $1m, you should get a little more scared of losing some significant part of that to a lawsuit. So you would probably increase your coverage. I see a lot of advice online implying that you would want to carry $1m of coverage to "cover" your $1m net worth but there is not direct relationship like that. Instead, you should buy enough insurance to feel comfortable with the odds that you will never get involved in an accident with a lawsuit against you for more than your insurance coverage. At this point you should probably max out to whatever level your insurance provider will allow because the price difference is likely small and losing $1m to cover someone's hospital bills would really suck.

As you are growing your net worth over $200k I would recommend the extra maybe $50/year to increase your liability coverage above $100k/$300k. Other things to consider in your risk calculation are whether the other party is likely to have under-insured coverage and/or health insurance, and whether those would relieve financial burden on yourself if you were responsible.

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The answer is, as always, that it depends.

Let's take a quick look at what those three numbers mean. The first number is the "per-person" personal injury liability amount. If you ran a red light tomorrow and T-boned another car, the insurance company would pay damages up to this amount to each person in the other car that was injured in the accident. What the actual damages would be depends on the severity of the accident and how many people were in the other car; remember that "personal injury damages" include not only the actual medical bills incurred to treat the immediate injury, but lost time, compensation for any long-term or permanent disability, pain and suffering, etc.

The second number is the "per-incident" personal liability amount. This limit provides a second level of upper limit; regardless of how many people were hurt and how much they come after you for, the insurance company will cover an overall maximum of this second amount in personal injury claims arising from a single accident. Again, damages awarded go beyond medical bills incurred.

The last number is the "property damage" liability amount. This is the money that pays to fix or replace the other person's car, repair or rebuild the wall or window you plowed through, repair or replace anything inside the car or on the other side of the wall that you damaged/destroyed, etc. Basically if it doesn't have a birth certificate, any damage you deal to it in the accident falls under this last number.

Given what each of those numbers represents, you must now make a decision. How much damage can you do in the average accident, and how able are you to cover anything that your insurance won't? The answers, for the majority of us, are "a lot" and "not at all" respectively.

Simple example: You run that red light and plow into another guy on his way to work in a 5-year-old Toyota Camry. He ends up injured badly enough to go to the hospital, and the car's totalled. The average hospital stay is about $33,100 according to a number I grabbed off Google. Add to that a month off the job at $4,500 gross monthly pay, a $500 ambulance ride, and some reasonable pain and suffering (say $5,000), but luckily he makes a full recovery with no long-term effects. You and your insurer are jointly on the hook for $43,100 in personal liability, plus the blue book value of the Camry as it was before the crash; say $15,000. Your insurer will stand between you and the other guy and hand him the check for both the personal injury and for the car. This happens every day, and while it's a huge inconvenience for a lot of people, after a few years things get back to normal for all involved.

Different example: You run the same red light and plow into the same Camry, but now the guy has his family with him; 3 more bodies in the car. You send all four of them to the hospital. The car, again, is totaled, but now that's the least of your worries; you now have four hospital stays at 30 large apiece, double the time off work for the man and his wife (two-income family), and quadruple the pain and suffering. For pretty much the same incident, just because there was more than one other person in that car, you are now liable for $162,200. Your 50/100/50 insurance policy only covers $100,000; you now have to make some sort of agreeable arrangement to pay them $62,200. If they aren't interested in a structured payment settlement, they can take your house, your retirement, your kid's college funds, anything of value that you have equity in. This is way beyond "inconvenient"; it could mean you owe someone else every spare penny a judge thinks you have for the rest of your life. If instead you paid a little more for a 100/300/100 policy, your insurer would have written the whole check.

Another different example; same red light, same you running it, only one guy in the other car... which is now a brand-new $80,000 BMW 6-series. Just to spice things up, he had a $3000 laptop in his briefcase on what used to be the passenger seat, that's now a crumpled hunk of metal and silicon. He's fine, thank God, but seriously cheesed off that his laptop and his midlife crisis are total losses. Your 50/100/50 plan? Leaves you on the hook for $33k in property damages. A 100/300/100 plan would have covered it in full (albeit probably putting you on public transit or a van pool for the next 3 years; a driver who totals a car worth more than 50 large is automatically put in the highest-risk pool of covered drivers).

So, to answer the question, look around. See the other cars around you on the road on your next commute. What is the average blue book value of those cars? How many people, on average, are in each one? You pretty much need insurance sufficient to ensure you can walk away from an accident not owing a penny for any level of damages you may incur that don't result in permanent disability or death.

Insurance for death and disability is not the kind of thing the average person can even afford; the average judgement for wrongful death is $2.9 million according to another number I pulled off Google. To be fair, that figure probably has a lot of medical malpractice - translated: deep pockets - figured into it, but wrongful death judgments in general are some of the most expensive you'll ever see. Consider future earnings potential alone; if you make the median $55,000, and you're 30 and plan to retire at 65, you would expect to bring home $1.925 million in that time. If someone accidentally killed you tomorrow, that's the least your family could expect to get in a judgement; it would be easy to argue for about another million more in retirement savings (which is your $2.9m right there). On top of that, there are less significant but still individually-insurmountable damages for loss of companionship, bereavement, medical expenses (they still send you a bill if you die), funeral expenses, your pain and suffering (if you weren't instantly killed) and punitive damages (if the death was considered a direct result of "willful disregard for human life"; basically if the circumstances were so preventable it took effort not to prevent them).

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Generally you want your coverage to protect all the assets that can be targeted. If you have more assets - you should get more coverage. If the assets are significant, an umbrella policy might be in order, instead of raising coverage on all the policies (homeowners, renters, car) you carry separately.

Re targets, some of the things you've mentioned are protected from creditors. See here for more details about the ERISA protections.

In bankruptcy filed under federal and most state laws ERISA accounts are protected up to million although in some state jurisdictions the protection is only up to /2 million. In fact, in Nevada courts, bankruptcy protection for ERISA plans is limited to only /2 million.

And here's another article (without the sales pitches).

If your savings are in a 401(k) account, they are protected from all forms of creditor judgments, including bankruptcy, says Kyle Brown, a retirement counsel with Watson Wyatt Worldwide in Arlington, Va. Solo 401(k)s, however, don't necessarily have the same protections as other 401(k) plans; in some states, solo 401(k)s are protected from creditors, but in others they aren't.

But good insurance coverage is preferable over bankruptcy, of course.

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Additionally, at least with regards to liability and injury coverage, you want to carry the highest levels you can afford - your health insurance provider may or may not cover injuries, and it almost definitely won't cover other folks' injuries: I carry the maximal level my carrier will allow for just that potentiality –  warren Dec 20 '12 at 15:33
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