Car insurance can be one of the most frustrating bills a person pays every month (or six) but it truly is one of the most important. At its core, insurance is designed to insulate an individual, family or business from possible financial hardship due to a loss. However, too often people are driving around with the absolute bare minimum insurance, not realizing that their entire world could get flipped upside down with just a relatively minor accident.
Insurance Minimums Explained
Insurance is governed at the state level, so each of the 50 states and Washington D.C. all have their own insurance laws and regulations as it pertains to auto insurance. The most regulated form of car insurance by the states is liability. Liability insurance protects someone when they are responsible for damage to another person or something another individual owns. The majority of states require at least a minimum amount of liability insurance be purchased before someone can legally drive on public roads.
For example, here are the minimum liability insurance requirements for the state of California:
• $15,000 – injury or death to one person.
• $30,000 – injury or death to more than one person.
• $5,000 – damage to property.
Let us break these down and describe what they all mean:
Injury or death to one person – The first item is the amount the insurance company will pay towards the medical costs or death of any one individual. It is important to note that this does not mean burial costs for someone who passes away; it means if their family sues you because they died, this is the max the ins
urance company will pay for.
Injury or death to more than one person – The second item is the aggregate total the insurance company will pay for all the people injured or killed in the accident. So if three people were all injured at a cost of $15,000 each, the insurance company would only pay for $30,000 total.
Damage to property – This line item is the amount an insurance company will pay towards the loss of any property involved in the accident. This includes cars, buildings, walls, etc. Anything unrelated to people typically falls into this category.
What Happens If You’re Underinsured
Now we will look at a scenario where an individual has the above listed state liability insurance minimums and is involved in an accident.
The at-fault driver hits a late model SUV and causes $15,000 of damage. In the car there is a family of four, all of which sustain injuries. For simplicity purposes we will say each passenger sustained $10,000 worth of medical treatment that the at-fault driver is liable for.
The at-fault driver’s insurance plan will cover up to $15,000 per individual, which is good because there was only $10,000 caused to each passenger. The problem is their aggregate total is $30,000 per accident, so they are responsible for the other $10,000. The insurance company will cover $5,000 of the damage done to the other car, which means they are responsible for another $10,000. That leaves $20,000 that the insurance company will not pay for and falls back on the individual to pay.
This scenario can be a lot worse if there are serious injuries, someone dies, or there is major damage to one or more cars. Costs can easily run into six figures for a big accident.
What should you do?
Get more insurance. Raising liability coverage is a lot more affordable than many people realize. It can often be as little as $30 every six months to carry five times the state minimums. It is important to price check the difference between current coverage and more coverage, because there could be huge exposure to loss if you are underinsured.
Eric Stauffer reviews insurance companies like Safeco and AAA Insurance. He is a former agent and now spends his time educating families and individuals on the different types of insurance they need and where to get it.
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