Having spent several years in the insurance industry and seeing my fair share of claim situations, I still get a chuckle out of all the commercials out there. Whether it is Farmers Insurance’s “We are Farmers” commercials, with a moose trying to untangle its antlers from a swing by thrashing around and destroying a motor home in process; or Allstate’s “Mayhem Guy” commercials, where he’s creating disasters either as the poorly secured “Christmas tree” falling off the car in the middle of traffic causing a major accident to jogging as the “hot babe” distracting a young driver, who subsequently plows into the telephone pole. As uncommon as they sound, these accidents actually do happen in real life.
One of my former colleagues once related a story about a sad pizza delivery driver who tried to dislodge his car from a ditch. Since he was all alone, his idea was to free the car by placing it into gear, run to the rear of the car and start pushing. If necessary, kick the rear bumper repeatedly until the vehicle was free. He tried this approach and to his surprise and horror, when he got the car out of the ditch, it started to travel down the road and so did he. His pant leg had become caught on the bumper, dragged him mercilessly and unrelentingly for one whole mile until it finally stopped. Along the way, the car struck a parked vehicle on the side of the road. After a broken ankle and abrasions up and down his body, the pizza guy lived to report the accident. Although it doesn’t seem like an accident to most reasonable minds, it certainly wasn’t intentional. The damage caused to the parked car was covered under his property damage liability coverage within his insurance policy.
Auto Liability Insurance 101
All crazy accidents aside, auto liability insurance is very important for the preservation of one’s wealth. Liability coverage pays for the treatment of injuries and the repair of damage you cause to others in an accident. It will also provide a legal defense for you in the event you are sued.
Automobile liability insurance limits are the maximum amounts the policy will pay out for an accident. You’re legally responsible for costs that exceed the limits. Generally, the liability limits are expressed as three numbers, referring to the amounts the coverage will pay for bodily injury and property damage. A policy with 250/500/100 liability coverage means it will pay up to:
- $250,000 for injuries per person, but limited to
- $500,000 for all injuries per accident
- $100,000 for property damage per accident
Most states require car owners to buy liability insurance. For example, Washington state minimum amount is $25,000/$50,000/$10,000. State requirements are obviously not coverage recommendations – they’re just the minimum amounts needed by a person to be able to drive legally. Injuries and property damage from a car accident can easily eclipse state minimums. Can you imagine “totaling” a Tesla, or any newer car for that matter, with only $10,000 in property damage coverage!
Shifting over to bodily injury claims, according to ISO, an insurance risk information service, about five percent of injury claims exceeded $100,000, while two percent reached $300,000 or higher. Additionally, Jury Verdict Research recently reported that the average award in a wrongful death case was $1,450,000. In any of these situations, if an individual only had the state minimum level of coverage, their personal assets would be ravaged, since they are legally exposed to the injured party, or related parties (i.e. insurers, hospitals, etc.), either way, devastating an individual’s personal net worth.
How frequently do auto accidents occur in the US? According to Driver Knowledge, in one year the US on average has an estimated 6 million crashes, with 3 million individuals reporting injuries. The answer, often enough, considering those crashes killed approximately 33,000 people!
Understand your current coverages to protect wealth
As part of our client review process, we always want to understand our clients’ entire financial situation. As our clients grow older, their net worth is also growing. It is not uncommon for individuals to have a net worth of several million dollars when they reach retirement age. So, it’s very important for them to properly protect their assets, not just for themselves, but for their loved ones.
If your insurance agent, has not been made aware of your current level of assets, you may have only negligible coverages or even maybe the state’s minimum coverages! That is precisely what one of clients recently found out. Although he had worked with his insurance company for over 25 years, he only had the state minimum level of coverages. This client, who had worked many years and was nearing retirement, with a net worth over one million dollars, could easily have had his life’s savings wiped out because of a lack of insurance protection.
Costs are minimal to improve protection though!
The Insurance Information Institute estimates it costs about $200 extra annually per vehicle to take your liability limit from $50,000 to $1 million per accident. In my client’s case his coverages could increase from 25/50/10 to 1.3M/1.5M/1.1M for around $250 more a year. Basically 30 times more coverage for approximately $20 more a month. That was an easy sell for my client and his insurance agent! (These limits included an **Umbrella Policy.)
Speaking of Umbrella Policies, the Insurance Information Institute also reports that a $1 million umbrella policy costs about $150 to $300 a year. A second million is another $75, and a third is $50. The umbrella policy typically has a $300,000 or $500,000 deductible, meaning that you must raise your basic coverage to ‘match-up’ the two policies to prevent a gap in coverage.
In Conclusion
Some areas of life are insurable and others are not, or it becomes too cost prohibitive. However, protecting one’s wealth through a proper and appropriate level of liability coverages, including an Umbrella Policy, is one of the easiest and relatively lowest cost insurance products available. As our client’s “Financial Partner for Life” we want to be certain their long term financial objectives are met. By working with our clients and their property and casualty insurer, we make sure they have the best levels of protection available and that are appropriate. Since most of our clients have accumulated assets over many years of hard work, it always makes sense to protect their wealth from whatever life throws at them, or for that matter, that Mayhem Guy.
**An umbrella personal liability policy extends the basic coverage provided in different types of liability coverage, including home, auto, boat and tenant policies. This type of policy provides broad coverage, meaning that some claims that would not be covered by a standard policy may be covered under the umbrella policy.)
Robert Lagonegro, CFP®
