If you’re in the market for a new home, your mind is probably already swamped with thoughts of mortgage lenders, interest payments, and closing costs. Even though adding something else to your already-crowded plate is likely the last thing you want to do right now, you’ve got to think about one more thing – your car insurance.
What does buying a home have to do with car insurance?
This is a question that most home buyers don’t know the answer to, but the answer is vitally important! Specifically, you need to look at the liability limits on your car insurance policy when you buy a new home. If they’re too low, you could be putting your brand new home at risk every time you get in the car!
For example, let’s say you only have the state-mandated liability coverage. Here in California, that means your insurance policy will cover up to $15,000 for an injury or death to one person, $30,000 for an injury or death to multiple people, and $5,000 for property damage. If you’re responsible for a bad accident that exceeds those limits, you’re on your own. If you get sued and lose, you’ll be responsible to pay the judgement out of your own pocket.
And that’s where the risk to your home comes in.
As soon as you buy a home, you have a new, very valuable asset. Let’s say your home is worth $500,000. Now let’s say you’re responsible for a car accident that caused $600,000 in damages. Your insurance company will fork over the limits of your liability coverage (a measly $5,000, $15,000, or $30,000 if you only have the state-minimum coverage) and you’ll have to come up with the remaining balance.
Unfortunately, here in California, your $500,000 home can be used as collateral – meaning that if you don’t have $500,000 sitting around to pay the judgement, you’ll be forced to sell your home and turn the money over to the person who sued you.
Terrifying, right? So how do you prevent this nightmare from happening to you?
Luckily, there’s an easy fix. All you have to do is increase your liability coverage! Ideally, your liability limits should match the value of your home. So, if your home is worth $500,000, you should have $500,000 in liability insurance on your auto policy. That way, if the worst happens, your insurance company will pay any claims or judgements on your behalf, and your home will remain your home.
This advice doesn’t just apply to homeowners, though. You should follow this rule of thumb ANY time you add something valuable to your asset portfolio. In fact, your liability coverage limits should match the total value of ALL your assets. That way, you won’t be putting your home, your boat, your art collection, your vacation property, or anything else of value at risk when you hop in the car to run a quick errand.
Yes, increasing your liability coverage will make your monthly premiums go up. However, paying a little bit more each month is well worth it when you consider the alternative!
But by purchasing wisely, you may be able to save yourself from a major rate increase. For example, many insurance companies offer a discount if you get multiple policies from them. So, when you go to buy homeowners insurance, you may want to consider getting your car insurance from the same company. That way, the money you save through a multi-policy discount can help offset the cost of higher liability coverage!
Not sure how to turn all of this advice into reality? Simply talk to an insurance agent. A good one will be able to answer all of your questions – including how to pick liability coverage that’s perfect for your needs. That way, you can sit back and prop your feet up in your new home with confidence!
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