Few cost savings feel better than lowering car insurance premium payments. If done without sufficient thought, reducing auto insurance premiums might be the most expensive savings you will ever make. Automobile insurance coverage should protect you from a disastrous loss of your personal assets. Many people who decide to lower their automobile insurance protection adopt a penny–wise and pound–foolish approach, worried more about paying a few thousand dollars for body repair than about being sued after an accident causing death or catastrophic injuries.
Imagine this nightmare: You are in your early 60s, thinking about a comfortable retirement, and helping your children and grandchildren with home down payments, college tuitions, and other blessed events. The million and a half dollar nest egg you have built up through decades of hard work, good income, and living within your means, makes you confident that your golden years will be financially secure. As your income declines and you trim some fat off your household budget, you decide to lower your car insurance coverage for bodily injuries to others, to $100,000 per person and $300,000 per accident ($100,000/$300,000), and to ditch that pesky umbrella policy. The savings of a few hundred dollars a year feels great.
One rainy night, the car you are driving collides with another car. You're sure you are not at fault, but the worst has happened. The driver of the other car, a 40 year old successful businessman, married with three children, dies. A couple of months after the accident, you are sued, served with a summons and a complaint alleging that your negligence caused the accident and death. You meet with your long–time personal attorney immediately, and learn that if a jury agrees with the man's estate that you were at fault, you could easily face a judgment of $2,000,000 or more. Your life's savings would be wiped out.
Automobile insurance is a painful, but absolutely necessary expense. A detailed analysis of the Massachusetts standard automobile policy is beyond the scope of this newsletter. Most Massachusetts drivers with any assets understand that they need more than the statutorily required minimum of $20,000/$40,000 for bodily injury caused to others, but drivers of means who think that $100,000/$300,000 is adequate, are depressingly common. Simply put, the more your financial worth, the higher should be your automobile insurance coverage for injuries caused to others. You need sufficient amounts of "optional bodily injury to others" coverage or a combination of the "optional..." coverage plus an umbrella liability policy. Even coverage of $2,000,000 may not be enough to cover a judgment if a jury found that your negligence caused catastrophic injuries such as paralysis. The higher your coverage, however, the greater the likelihood that an injured party would accept your policy limits and release you from personal liability, rather than taking the risk of going to trial.
You should also consider substantial amounts of protection covering you, a household member, or an occupant of your car, should you be injured by an uninsured driver or a driver with insufficient insurance, known as "uninsured" and "underinsured" coverage respectively. You can purchase the same limits of uninsured/underinsured coverage as your optional bodily injury to others coverage not, however, the same limits as your umbrella policy. If you are absolutely determined to save money on your car insurance premiums by lowering coverage, it is probably wiser to raise your collision deductible or lower your coverage for damage to someone's else's property. Even if these savings especially the lowered coverage for damage to another's vehicles, are also penny–wise and pound–foolish, they do not invite financial ruin.
The best thing you can do before deciding on your automobile insurance coverage is to find an insurance agent you trust and discuss with him what is enough coverage. Be sure to give the agent a good idea of your net worth, and to tell him that while you want to save money on premiums, your primary goal is to avoid a financial disaster if you are ever in a serious accident. Then you can get back to cursing those insurance companies you will get no argument from me knowing that you have protected what you worked all your life to earn.