How Much Car Insurance do You Need?

I had coffee last week with a friend of mine in Dallas.  We’ll call her Abby, not her real name.  We were catching up on each other’s summer and how our businesses were doing; they’re both growing.  Abby owns one of the top catering companies in Dallas handling everything from a family meal, when no one feels like cooking, to a sit down dinner for 5,000 people.  She’s quite the chef!  When my wife had eye surgery earlier this year, Abby gave me a batch of her tortilla soup to aid in Sheri’s recovery.  It was the best soup either of us has ever had.

Abby asked me to review her personal car insurance renewal she’d just received from her carrier.  Even though I’d not written her policy, I was willing to review it, provide guidance, and quote it if she wanted me to.  Abby asked if I could save her money on what she was paying.

What struck me was not how much she is paying but the level of coverage she’s carrying with a large national insurance company.  They were the Texas State minimum levels or 30/60/25.  These limits are referred to as split limits because there are 3 numbers and may vary by State.  Most Texas car insurance policies utilize the following split limit levels:

  • 30/60/25
  • 50/100/50
  • 100/300/100
  • 250/500/100
  • 500/500/100

Each number corresponds to a specific type of liability coverage the car insurance policy will pay when the policy holder, or insured, is involved in an at fault accident.

The first number is the maximum amount paid to any individual in the car hit by the policy holder for medical attention.  In Abby’s case, that amount is $30,000.

The second number is the maximum amount paid for all individuals in the car hit by the insured, if there is more than one injured person.  Abby’s maximum amount of coverage is $60,000 total.  Regardless of the chosen limit, no one person receives more than the first or individual number.

The third number is the maximum amount paid for damage to the car or cars hit by the policy holder.  The maximum amount of coverage for Abby is $25,000 and that would not be enough to coverage a new Ford Taurus, Honda Accord, or Toyota Camry, let alone a totaled Lexus, BMW, or Mercedes Benz.

I was shocked at Abby’s coverage.  My advice was to immediately increase her limits to the 100/300/100 level if not higher.  Carrying minimal limits exposes Abby to a lawsuit should someone in the car she hits be injured and require medical care.  The financial impact for a small business owner could be devastating.

I usually do not recommend the Texas State minimum liability limits to any of my clients unless they simply can’t afford more, such as a recent college grad.  Whenever I talk with an existing or prospective client about car insurance, I recommend each level of split limits based on the following rationale:

Limits

Recommendation Criteria

50/100/50

This is the minimum limit I recommend as it will protect a new grad working in their first job if they hit most new cars. 

100/300/100

For new home or condo owners & people with a combined household income of $50,000 to $100,000 a year. 

250/500/100

People in middle to upper management, business partners, doctors, dentists, lawyers, architects, people with a swimming pool or trampoline, or people with a combined household income of $100,001 to $150,000. 

500/500/100

Families with a combined household income of $150,001 or greater, the professions mentioned in the prior level, and home owners with a home valued more than $500,000. 

In Abby’s case, I recommended she have limits of 250/500/100 as this level provides good protection until her business grows.  Abby understood and appreciated my logic, but could not come to terms with spending more for car insurance when she’s looking to reduce her expenses as her business grows.  She chose to remain with her current personal insurance provider.  Her decision did not impact our friendship because I believe our friendship is more important than any business we’ll ever transact together.  Abby appreciates that and I’ll provide her with an updated set of quotes in 6 months.

Do you have a question, comment, or experience you’d like to share?  Post them in the comments section of our blog or on our Google + or Facebook pages.  I’d love to hear from you.

Thanks!

Ed Wise

Ed Pic

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