Contrary to instinct, your quest for the right car insurance doesn’t start with your car. How can this be? A little thing called liability, more specifically bodily injury liability and property damage liability. Liability actually doesn’t even start with a conversation about car insurance at all. It starts with a conversation about something called net worth or the value of your personal assets after all personal debts have been subtracted. Your net worth is what someone will pursue if you hard held responsible for an automobile accident that involves your car.
The first question you need to ask yourself is whether or not you own your home. If you own a home chances are you have an average of $29,000 worth of equity in that home available for the taking by someone who might sue you due to your liability associated with a car accident. Many folks actually have more equity than that available. With 65% of America owning a home and that being the largest asset on their balance sheet, you can bet that someone looking to pay for their car repair and medical bills associated with your mistake will be looking for you to pay if you are found at fault.
To determine how much equity someone could go after you need to start by finding the estimated value of your home. Zillow.com and Trulia.com are good places to start when trying to figure out your home’s value. Another good place to look for an estimate is your local county courthouse who keeps an estimate on file for collecting your property taxes. Once you have that estimate then subtract any mortgage debt including first mortgages, second mortgages or home equity lines. According to the Survey of Consumer Finances, the average home in America is worth $170,000 while the debt secured by the average home is $141,000 leaving the average consumer with $29,000 worth of equity ($170k-$141k=$29k).
The other reason why this question is so important is because liability makes up 61% of your annual premium on average, or $492 of the $797 national average annual premium. The tighter you can control this portion of your premium the lower your cost will be while still getting the maximum benefit from your policy. Although state minimum coverage requirements mandate certain levels regardless of net worth, many benefit from managing their premiums on the liability portion of their car insurance.
If you happen to be among those of us who have worked hard and had great success to the point that you can’t get enough standard auto insurance to cover your net worth, be sure to check into an umbrella policy to cover your additional assets. If you happen to be a renter and don’t have much, if any, equity in your vehicle then state minimum liability coverage is likely for you. Keep in mind that liability coverage does not cover your medical costs, uninsured drivers, or your car repair costs. For those expenses you will need additional coverage that includes medical payments insurance coverage, uninsured motorist bodily injury insurance coverage, uninsured motorist property damage insurance coverage, collision insurance coverage, and comprehensive insurance coverage.
Ultimately, managing ones liability insurance and making sure that you have your net worth covered are integral first steps in your journey to get the right car insurance. Once you have calculated your net worth and estimated how much you have to loose in an auto accident then you are prepared to have the conversation about how much liability coverage you and your family need.
