Auto Insurance, shift your focus: Liability Matters

Most people think about auto insurance in terms of their car, their deductible, or their rental car coverage. And honestly, that’s not their fault, it’s how most insurance agents are trained to sell it. They ask the usual questions:

• “What deductible do you want?â€
•  “Do you need rental car reimbursement?â€
• “Would you like roadside assistance?â€

These things are important. But they’re not what will ruin your financial future if you ever get into a serious accident.

What really matters isn’t your stuff, it’s the other person’s stuff and their bodily injuries if you are found at fault.  More importantly, it’s how much liability coverage you have to protect your assets and future income.

The Big Mistake Most People Make

A great insurance advisor will stop their client from focusing too much on rental cars and towing and instead ask:

• “What happens if you cause a major accident?â€
• “Do you know how the state litigates liability claimsâ€
• “What if someone sues you for more than your policy covers?â€

Here’s why that matters.

The Illinois Liability Nightmare

In Illinois, if your bodily injury limits don’t fully compensate an injured party, you can be sued for the rest.  And if the court finds you responsible or negligent and in turn rules against you, they can potentially garnish your wages—up to 15% of your gross income after depleting your nonexempt assets. 

A Real-World Scenario That Could Destroy Your Finances

Let’s say you have 100/300 bodily injury limits (that’s $100,000 per person, $300,000 per accident). That sounds reasonable, right?

Now imagine you hit someone who is 40-years-old, earns $100,000 a year and who’ full retirement age is 67.  And they do not survive the accident. 

The deceased family’s economic loss is calculated to be 2.7 million dollars.  ($100,000 annual income over 27 years).

Your insurance company writes the surviving spouse a check for $100,000 (their contractual obligation).   At this point the victim’s family has two choices:

1. Accept the $100,000 payout and move on.
2. Hire an attorney and pursue you individually for their loss.

While you could try to pass the responsibility back to your insurance company or the agent (if you didn’t select your coverage online yourself), chances are that your world, as well as the family who lives you impacted, will be in an all-consuming whirlwind for years to come. 

Why More Coverage Also Buys You Better Legal Protection

Once the insurance company pays their contractual obligations, they go away, and as does their legal team that was representing you.  Leaving you to flip the bill for legal representation if the family chooses to pursue you for compensation beyond the insurance policy’s payout. 

In short, the more liability insurance you have, the greater the extent of the legal defense your insurance company provides.

How to Actually Protect Yourself

Most insurance agents do a great job of making sure your car is covered. But what they should be focused on is protecting your income, your home, your savings, your entire financial future.

The old rule of thumb? Your liability limits should be at least 5x your annual income OR equal to your household’s net worth. 

While staying within your budget, you should transfer as much risk to the insurance company as possible for liability claims and in many cases personal liability umbrellas come as cheap as $300 annually for an extra million dollars of protection. 

The Bottom Line: Protect Your Future, Not Just Your Car

It is important to protect your personal property for sure as a car is big expense today.  It is arguable more important to protect our assets and future income with as much diligence. But we must also consider a few more things:

• Its socially responsible to make sure that others are protected in the event that we cause that once in a lifetime accident.
• Our time and mental health are valuable.  Bad situations adversely impact both of these things but carrying the financial burden as well is life-altering.  Additionally, living in court while drowning in legal bills can feel hopeless. 
• Your limits of liability can in some ways protect you as well.  Almost all policies have matching under and uninsured motorist coverage (Illinois) as their limits of bodily injury liability.   This means that you have good coverage for your medical expenses incurred if someone hits you with inadequate coverage. 

Because when the worst happens, it’s not your car you need to worry about—it’s everything else.