How Much Liability Coverage Should I Have?

Understanding Liability Coverage Limits

What the numbers mean:

Liability coverage is expressed as three numbers: 100/300/100

First number (bodily injury per person): • 100 = $100,000 per person • Maximum the insurance pays for one person's injuries in an accident you cause

Second number (bodily injury per accident): • 300 = $300,000 per accident • Maximum the insurance pays for all injuries in one accident you cause • This is the total for all injured people combined

Third number (property damage per accident): • 100 = $100,000 property damage • Maximum the insurance pays for property you damage in an accident you cause • Covers vehicles, buildings, fences, and other property

Example scenario (100/300/100 coverage):

You run a red light and hit a car with three occupants: • Driver: $120,000 in medical bills • Passenger 1: $80,000 in medical bills • Passenger 2: $50,000 in medical bills • Vehicle damage: $40,000

Your 100/300/100 policy pays: • Driver: $100,000 (per-person limit) • Passenger 1: $80,000 (full amount) • Passenger 2: $50,000 (full amount) • Total bodily injury: $230,000 (within $300,000 per-accident limit) • Property damage: $40,000 (within $100,000 limit)

You pay out-of-pocket: • $20,000 (driver's remaining medical bills) • Total out-of-pocket: $20,000

Without adequate coverage, that $20,000—or much more—comes from your savings, home equity, or future wages.

Why State Minimums Aren't Enough

Common state minimum: 25/50/25

Many states require only: • $25,000 per person injured • $50,000 per accident • $25,000 property damage

Why this is inadequate:

Medical costs are expensive: • Emergency room visit: $1,500-3,000 • Ambulance ride: $500-1,500 • Hospital stay (3 days): $30,000+ • Surgery: $20,000-100,000+ • Long-term care/rehabilitation: $50,000-500,000+

One serious injury easily exceeds $25,000. Multiple injuries or a fatality can result in millions in damages.

Property damage adds up quickly: • Average new car: $48,000 (2024) • Luxury vehicles: $60,000-100,000+ • Multiple vehicles + property: $100,000+

If you hit a Tesla or Mercedes, $25,000 property damage coverage won't come close to covering the loss.

Real-world scenario (25/50/25 coverage):

You cause an accident injuring two people: • Person 1: $80,000 medical bills • Person 2: $60,000 medical bills • Property damage: $50,000 • Total damages: $190,000

Your 25/50/25 policy pays: • Person 1: $25,000 (per-person limit) • Person 2: $25,000 (per-person limit, and you've hit the $50,000 per-accident limit) • Property damage: $25,000 • Total paid by insurance: $75,000

You owe out-of-pocket: • Person 1: $55,000 • Person 2: $35,000 • Property: $25,000 • Total out-of-pocket: $115,000

This can lead to wage garnishment, liens on your home, bankruptcy, and financial devastation.

State minimums were set decades ago: Most state minimums haven't increased in 20+ years, while medical costs, car prices, and accident settlements have skyrocketed.

Recommended Liability Coverage Amounts

For most drivers: 100/300/100

Who this fits: • Homeowners with $100,000-500,000 in assets • Middle-income earners ($50,000-150,000 annual income) • Families with savings, retirement accounts, or home equity • Anyone who wants solid protection at reasonable cost

Why 100/300/100: • Covers most accidents involving serious injuries • Protects against damage to expensive vehicles • Costs only moderately more than state minimums • Industry-standard recommendation

Annual cost increase vs. state minimums: Upgrading from state minimums (25/50/25) to 100/300/100 typically adds $150-300 per year—just $12-25/month for significantly better protection.

For high-income or high-net-worth individuals: 250/500/100 or higher

Who this fits: • Household income $150,000+ • Net worth $500,000+ • Significant assets (home equity, investments, retirement accounts) • Business owners or professionals • Anyone with substantial assets at risk

Why higher limits: • You have more to lose in a lawsuit • Plaintiffs' attorneys target defendants with assets • Serious accidents can result in multi-million-dollar judgments • Higher limits prevent personal financial ruin

Cost: Upgrading from 100/300/100 to 250/500/100 adds roughly $100-200/year.

For ultra-high-net-worth individuals: Umbrella policy

Who this fits: • Net worth $1 million+ • Substantial real estate holdings, investments, or business interests • Anyone wanting maximum protection

Umbrella policy: • Provides $1-5 million (or more) in additional liability coverage • Covers auto, home, and other liability exposures • Requires underlying auto liability of 250/500 or 300/500 • Costs $150-400/year for $1 million in coverage • Extremely cost-effective protection

For young drivers or those with minimal assets: 50/100/50 (minimum recommended)

Who this fits: • Young drivers (teens, early 20s) • Renters with minimal assets • Low income with few assets at risk

Why 50/100/50 is the floor: • Still provides more protection than state minimums • Covers moderate accidents • Affordable ($50-100/year more than minimums) • Protects your future earnings (even if you have few assets now, future wages can be garnished)

How to Determine the Right Liability Limits

Step 1: Calculate your total assets

Add up everything you own: • Home equity (current value - mortgage) • Savings and checking accounts • Investment accounts (brokerage, stocks, bonds) • Retirement accounts (401(k), IRA, though some states protect these) • Vehicle value • Personal property (jewelry, electronics, collectibles) • Business assets (if applicable)

Step 2: Consider your income

In many states, future wages can be garnished to pay judgments. High earners face greater risk even if current assets are modest.

Step 3: Apply the general rule

Choose liability limits equal to or greater than your total assets.

Example: • Total assets: $400,000 (home equity $200K, retirement $150K, savings $50K) • Recommended liability: 250/500/100 or umbrella policy

Step 4: Consider your risk factors

Increase coverage if you: • Have teenage drivers on your policy (higher accident risk) • Commute long distances in heavy traffic • Live in high-cost areas (expensive vehicles, higher medical costs) • Own rental properties or have other liability exposures • Want maximum peace of mind

Step 5: Balance cost and protection

Higher limits cost more, but the difference is often modest: • 50/100/50: Baseline cost • 100/300/100: +$150-300/year • 250/500/100: +$250-500/year • $1M umbrella: +$150-400/year

For most people, an extra $200-400/year ($15-35/month) for comprehensive protection is money well spent.

What Happens If You Don't Have Enough Liability Coverage?

Personal liability: If damages exceed your coverage, you're personally responsible for the difference. Injured parties can: • Sue you: Obtain a judgment against you in court • Garnish wages: Take a portion of your paycheck (typically 10-25%) • Place liens on property: Prevent you from selling your home without paying the judgment • Seize assets: Force sale of property or garnish bank accounts • Pursue bankruptcy claims: Even bankruptcy may not discharge some personal injury judgments

Financial devastation example:

You cause a serious accident: • Total damages: $500,000 • Your coverage (25/50/25): $50,000 • You owe: $450,000

Payment plan through wage garnishment (20% of income): • Annual income: $60,000 • 20% garnishment: $12,000/year • Years to pay off: 37+ years

This doesn't include interest, legal fees, or the financial strain on your family.

Your assets at risk: • Home equity (except in homestead states with protections) • Bank accounts • Investment accounts • Vehicles (beyond necessity exemptions) • Inheritances and future earnings

Retirement accounts: Some states protect retirement accounts from judgments; others don't. Don't assume your 401(k) is safe.

Emotional and life impacts: • Decades of financial stress • Damaged credit • Difficulty securing loans • Strained relationships • Delayed retirement

How Much Does Higher Liability Coverage Cost?

Sample annual premiums (national averages):

State minimum (25/50/25): • Annual cost: $400-600

50/100/50: • Annual cost: $500-750 • Cost increase: $100-150/year ($8-12/month)

100/300/100: • Annual cost: $600-900 • Cost increase vs. minimums: $200-300/year ($15-25/month)

250/500/100: • Annual cost: $700-1,100 • Cost increase vs. 100/300/100: $100-200/year ($8-15/month)

500/500/500: • Annual cost: $800-1,300 • Cost increase vs. 250/500/100: $100-200/year

$1 million umbrella policy: • Annual cost: $150-400 • Requires: Underlying auto liability of 250/500 or higher

Why higher limits are cost-effective:

Liability insurance is relatively inexpensive because most drivers never cause serious accidents. Insurers spread the risk across millions of policyholders, making higher limits affordable.

Cost-benefit perspective: • Extra cost for 100/300/100: $200-300/year • Protection gained: $300,000 in injury coverage + $100,000 property damage • Potential savings: Hundreds of thousands in personal liability avoided • Peace of mind: Priceless

Liability Coverage and Umbrella Policies

What is an umbrella policy?

An umbrella policy provides additional liability coverage beyond your auto and home insurance limits. It "sits over" your underlying policies.

How umbrella policies work:

Example: • Auto liability: 250/500/100 • Umbrella policy: $1 million • Total protection: $1.5 million (for injuries; $1.1 million for property)

If you cause an accident with $800,000 in damages: • Auto liability pays: $500,000 (per-accident limit) • Umbrella pays: $300,000 • You pay: $0

Without umbrella: You'd owe $300,000 out-of-pocket.

Umbrella policy benefits: • Covers auto, home, and other liability (lawsuits, slander, libel, etc.) • Extremely affordable: $1 million coverage for $150-400/year • Required for high-net-worth individuals • Provides legal defense costs in addition to policy limits

Typical umbrella policy requirements: • Minimum auto liability: 250/500/100 or 300/500/100 • Minimum home liability: $300,000-500,000 • All vehicles and properties insured with the same company (or at least disclosed)

Who needs an umbrella policy? • Net worth $500,000+ • High income ($150,000+ household) • Homeowners with significant equity • Anyone wanting maximum liability protection • Landlords or business owners with additional exposure

Cost for additional coverage: • $1 million: $150-400/year • $2 million: $250-500/year • $5 million: $400-800/year

Common Liability Coverage Questions

Q: Should I match property damage limits to bodily injury limits?

A: Not necessarily. Property damage is typically less expensive than injury liability. 100/300/100 is common, but some opt for 100/300/50 to save a small amount. However, expensive vehicles and multi-car accidents can exceed $50,000 easily, so $100,000 property damage is recommended.

Q: Can I lower other coverages to afford higher liability limits?

A: Yes. If budget is tight: • Increase your collision and comprehensive deductibles ($500 to $1,000) • Drop collision/comprehensive on older, low-value cars • Bundle auto and home insurance for discounts • Shop around for better rates

Prioritize liability over collision/comprehensive. Collision and comprehensive protect your car; liability protects your financial future.

Q: Do I really need more than my state minimum?

A: Absolutely. State minimums are dangerously low and will not protect you in serious accidents. One major accident can wipe out your savings, retirement, and home equity. Higher limits are essential.

Q: Will higher liability limits cause my rates to skyrocket?

A: No. Increasing liability limits adds moderate cost—typically $150-500/year depending on how much you increase. The protection gained far outweighs the cost.

Q: What if I cause an accident exceeding my limits while driving for work?

A: Your employer's commercial auto policy should cover you, but not always. Check with your employer and consider higher personal limits or an umbrella policy if you regularly drive for business.

Frequently Asked Questions