Wednesday, June 4, 2008

How much insurance should you have?

The amount of insurance coverage you purchase is called the "limit" of the insurance--the maximum amount the insurance will pay. Most policies have two limits, the per person limit and the aggregate limit. The per person limit is the most that will be paid to any single person. The aggregate limit is the total amount the insurance policy will pay. If you have an auto policy with limits of $20,000/$40,000, and you injure three people in a car accident, the most any single person can recover from your insurer is $20,000. The total all three people can recover from your insurer is $40,000.

Of course, if you have severely injured someone, they can seek amounts in excess of your policy limits. If they win at trial, that excess amount will come from you.

In deciding the amount of insurance you should have, you should consider:

* The amount of damages you may cause if you are negligent. For example, in attorney malpractice insurance, the common advice is to have enough insurance to cover the full value of the largest cases you work on.

* What your own assets are. In a typical case, the plaintiff's attorney will not encourage the plaintiff to seek amounts in excess of the policy limits if you have limits that are reasonable in light of your personal situation. If you are rich, or even comfortably middle class, and you have the minimum auto policy coverage of $20,000, and you severely injure someone in an accident, it is likely that the injured person will seek to go after your personal assets. If you have very little income, savings, or assets, the injured person may seek a small contribution from you as a matter of principle, but the plaintiff's attorney will understand there is little to gain by forcing you into bankruptcy.

* The moral issues. How would you feel if, for example, you severely injured a person so that he is disabled, unable to work, and unable to take care of his kids, and the most he could get from your insurer is $20,000? A large financial settlement from your insurer obviously won't give him his health back, but it will help make his post-accident life easier. Such a settlement is only possible if you have higher coverage.

* The cost of the premiums. Until this year all personal auto policies in Massachusetts cost the same for whatever level of coverage you were purchasing, no matter which insurer you used. With deregulation you will need to shop around for the best price. While you're at it, compare prices for different levels of coverage.

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