The Right Amounts of Insurance

How can we know how much is the right amount for auto and home insurance? The short answer is as much as the insurance company is willing to give us, for the lowest possible cost. I want full replacement value for all of my most valuable assets. If my home burns to the ground, I want the insurance company to pay to rebuild the whole house, not just the kitchen. If they would not rebuild my house the way it was before the fire, what is the point of even having insurance? I also want to retain as much of the risk as I can afford to retain through high deductibles so my premiums will be as low as possible without sacrificing high coverage limits.

Although everyone’s insurance needs are unique and should be reviewed by a competent advisor, here are some general guidelines:

Auto Insurance

Liability limits are the biggest priority. I normally recommend the highest available liability limits, which are typically $250,000/500,000/100,000, and the highest available deductible, which is usually $1,000. If your coverage is currently significantly lower than this, you may be surprised to discover how inexpensive dramatically increasing your coverage will be, especially when you simultaneously raise your deductibles.

Homeowners Insurance

Be sure your home is insured for full replacement cost, but no more. You should periodically ask your agent to complete an updated replacement cost estimate to determine whether your coverage needs to be adjusted. Keep in mind that your home may need to be insured for more than it is currently worth because replacement cost is not directly related to market value, rather the estimated cost of labor and materials for rebuilding your home from scratch. I also recommend the highest available liability limits and at least a $1,000 deductible.

Most homeowners insurance policies automatically come equipped with plenty of general personal property coverage. However, watch out for exclusions and limitations on certain types of personal property. Typically insurance companies will not pay much for stolen or damaged jewelry, musical instruments, art work, or other valuable collectibles unless you add an endorsement to specifically cover these items for their full value. It might also be helpful to keep receipts, pictures, or videos of your personal belongings in a safe place offsite so you could easily prove to an insurance adjuster what you are entitled to in the case of a loss.

Umbrella Liability Insurance

What is an umbrella? It covers any personal liability that exceeds the limits of auto and homeowners insurance policies. It also covers other types of personal liability, such as libel or slander, but does not cover business-related activities. Coverage options range from $1,000,000 to $10,000,000. Typically I recommend at least $1,000,000 for people making a good income even if they do not yet own many assets, to help prevent the risk of their wages being garnished in the case of a major judgment against them. Of course people with substantial assets may be wise to acquire higher limits relative to their net worth.

Does that seem excessive? Wouldn’t a $250,000 liability limit per person be more than enough to cover any auto accident? True, it would cover most accidents, but not every accident.

What if the person you hit is killed or sustains injuries so severe that she cannot work for the rest of her life? How much should her family be entitled to receive? That depends on her age and income.

Let’s say she is 35 years old and makes $100,000 a year. Would it be unreasonable to suggest that she could have worked at least another 20 years if you had not hit her? Income of $100,000 per year for 20 years would be at least $2,000,000 total potential income lost. What about the cost of medical expenses, pain and suffering, and vehicle damage, on top of the income loss? What would you want for your family if you were the victim in this situation? Would you be greedy for wanting at least $2,000,000, or would that be reasonable compensation for your loss? I think it would be totally reasonable, and so do the courts.


Adam Dawson, CFP® is a Principal at Capstone Capital and the author of Timeless Principles of Financial Security.