Author Topic: Insurance Premium Guidance  (Read 1842 times)

lifeminimalized

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Insurance Premium Guidance
« on: December 12, 2016, 08:16:41 PM »
So I did a little searching, could not find a solution to my exact scenario.

I have a relatively low net worth. Do not own a home, retirement relatively low at the moment.

If I had to put a number on my net worth at the moment it would be 35K

Despite have a lower net worth, I could still be on the hook for payments indefinitely if I get into a bad liability situation?

Initially, I was a little ignorant and figured since I could not be sued for much (plus retirement usually having protection) that I would hold state/lein holder minumums. However I'm re-evaluating and would like to hold a healthy premium that isn't light nor heavy.

Thoughts given my net worth?

ender

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Re: Insurance Premium Guidance
« Reply #1 on: December 12, 2016, 08:25:46 PM »
Insurance for... what?

lifeminimalized

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Re: Insurance Premium Guidance
« Reply #2 on: December 12, 2016, 08:27:49 PM »
Insurance for... what?

Haha wow, I'm wicked sorry.

Auto insurance premium.

merula

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Re: Insurance Premium Guidance
« Reply #3 on: December 13, 2016, 08:00:02 AM »
Insurance professional here. I'm assuming you're in the US? Different countries have different liability laws, so that makes a difference.

Let's say that you cause a car accident that resulted in multiple serious permanent injuries, for a total liability of $2M. That's more than most people have in insurance or net worth, and far far more than the minimum liability limits of any state.

So, what would the recourse of the victims of that accident be? In order of easiest to most difficult:
-Your limits of liability, the full amount that the insurance company would pay. (Note: no deductible for liability.)
-Their own uninsured/underinsured motorist limit (Their insurance pays for losses they suffer because of an uninsured or underinsured driver. https://en.wikipedia.org/wiki/Uninsured_motorist_clause)
-Their own personal injury protection coverage (Their insurance pays for their medical expenses. https://en.wikipedia.org/wiki/Personal_injury_protection)
-They can sue you, and your insurance company is out of it because they already paid their limit. (Note: whether they'll defend you depends on a lot of factors.)

So, let's say that after exhausting the first three, they still have $1.5M in damages. That's a lot of money that they probably want to try to get, so they'll try to sue you. But you can't get blood from a stone, and you could easily declare bankruptcy, especially if most of your money is in retirement accounts or your house that would be considered protected assets.

Most likely, if your financial situation is not clearly well-off, any lawyer is going to advise not suing, because the cost just isn't worth the benefit.

Stash Engineer

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Re: Insurance Premium Guidance
« Reply #4 on: December 13, 2016, 09:26:53 AM »
good info merula!
Chuck Norris is so fast, he can make a fire by rubbing two ice cubes together.

merula

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Re: Insurance Premium Guidance
« Reply #5 on: December 13, 2016, 10:04:43 AM »
You're welcome.

I personally buy $300,000 of auto liability, with full UM/UIM, but no umbrella. My net worth doesn't figure into my considerations for liability. 80% of my assets are in either my house (which would be a fully protected asset in my state) and my retirement accounts (employer-sponsored 401(k)s are fully protected; IRAs are generally protected up to $1M. http://www.wsj.com/articles/SB124181801239401917)

If my net worth was significantly more exposed, I would probably weigh buying an umbrella against finding other ways to protect my assets from creditors. Umbrellas are (generally speaking across the industry) significantly more profitable than other lines of business, meaning that there's much more benefit to the insurer than to the insured in buying them.

lifeminimalized

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Re: Insurance Premium Guidance
« Reply #6 on: December 13, 2016, 11:07:13 AM »
So it sounds feasible for me to carry state minimums?

All of my net worth is in my retirement account (35K) and I do not own a home.


merula

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Re: Insurance Premium Guidance
« Reply #7 on: December 13, 2016, 12:01:59 PM »
You could. That's what the law says, after all, so if more was required, they'd just raise the minimums, right? (Cue Office Space quotes.)

The problem is that the counterargument to raising the minimum liability limits is that more people will go without insurance as it becomes more expensive. From a public policy perspective, would you rather have 90% of the driving population insured at limits that cover 50% of all accidents, or 50% of the population insured at limits that cover 90% of all accidents? You'd rather have the former, for two reasons: (1) There's more coverage for more accidents; even the ones where the limit is insufficient have some coverage, and (2) The insurance company needs to defend their insured, and that (often significant) cost is outside of the limits.

In choosing a limit, an alternative to the common "protect your assets" method (limit~=net worth) is "protect yourself". If an uninsured driver slams into your car causing you (and your family?) serious injuries, what kind of protection would you want to have? Then buy that liability limit and a matching UM/UIM (and PIP, if available in your state) limit. Insurance companies won't sell you a UM/UIM limit that's more than your liability limit, so a higher liability limit is the only way to get that coverage.

For me personally, when I drive it's typically with my husband and two children. It's not likely that we'll get into a crazy accident that causes all of us major injuries, but chances are that the total injuries to all of us would add up quickly, so $300k seemed reasonable to me.

Also, on a broader note to mustachians, UM/UIM and PIP coverage are available for ANY motor vehicle accident that causes you damages, you don't have to be in a car yourself. Uninsured driver hits you on your bike or while walking? Still a motor vehicle accident and your coverage follows you, not your car. If you don't have a car, I still recommend buying non-owned auto coverage, which ends up being pretty cheap. (I got my sister a policy for $200 for two drivers.)

lifeminimalized

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Re: Insurance Premium Guidance
« Reply #8 on: December 13, 2016, 12:15:42 PM »
You could. That's what the law says, after all, so if more was required, they'd just raise the minimums, right? (Cue Office Space quotes.)

The problem is that the counterargument to raising the minimum liability limits is that more people will go without insurance as it becomes more expensive. From a public policy perspective, would you rather have 90% of the driving population insured at limits that cover 50% of all accidents, or 50% of the population insured at limits that cover 90% of all accidents? You'd rather have the former, for two reasons: (1) There's more coverage for more accidents; even the ones where the limit is insufficient have some coverage, and (2) The insurance company needs to defend their insured, and that (often significant) cost is outside of the limits.

In choosing a limit, an alternative to the common "protect your assets" method (limit~=net worth) is "protect yourself". If an uninsured driver slams into your car causing you (and your family?) serious injuries, what kind of protection would you want to have? Then buy that liability limit and a matching UM/UIM (and PIP, if available in your state) limit. Insurance companies won't sell you a UM/UIM limit that's more than your liability limit, so a higher liability limit is the only way to get that coverage.

For me personally, when I drive it's typically with my husband and two children. It's not likely that we'll get into a crazy accident that causes all of us major injuries, but chances are that the total injuries to all of us would add up quickly, so $300k seemed reasonable to me.

Also, on a broader note to mustachians, UM/UIM and PIP coverage are available for ANY motor vehicle accident that causes you damages, you don't have to be in a car yourself. Uninsured driver hits you on your bike or while walking? Still a motor vehicle accident and your coverage follows you, not your car. If you don't have a car, I still recommend buying non-owned auto coverage, which ends up being pretty cheap. (I got my sister a policy for $200 for two drivers.)

Great post and you make valid arguments. Let me ask you this.

If you were single, making ~60k, rented, had minimal assets aside from retirement. What would you go with exactly for full coverage?
« Last Edit: December 13, 2016, 12:17:18 PM by lifeminimalized »

merula

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Re: Insurance Premium Guidance
« Reply #9 on: December 13, 2016, 02:33:45 PM »
How old are you, or, how close are you to FIRE?

Worst case scenario is an accident that leaves you with large, ongoing medical expenses and prevents you from working. Let's say that either you were at fault and uninsured, or the at-fault driver was uninsured and you didn't have any coverage for yourself (UM/UIM or PIP), so you're SOL. What would you need?

Well, if you're FIRE, not much. You would probably qualify for Social Security Disability Insurance (assuming you participated in SS while working), which would be income you weren't planning on getting before the accident, AND you'd be eligible for Medicare after two years of SSDI, so that takes health care costs out of your budget. You'd probably have some increases costs of living (can't bike everywhere because of injuries, need new house to accommodate a wheelchair, possibly need home health aides), but other costs would likely be lower (travel?), so you could probably find a way to work everything out without any insurance payments. And since my motto is don't insure what you can afford to replace, I would probably say you'd be good with just the minimum liability.

But you say you have a net worth of $35k, so I'm going to take from that that you're not close to FIRE. If you couldn't work and had large, ongoing medical expenses, what would you need?

Well, you'd need a few months of living expenses while you qualified for SSDI, if you even qualified. You have to have paid enough into the system to collect SSDI, so if you're very early in your career, you might not get anything. If your health insurance is from your employer and you can't work, you'd need money to pay for COBRA and then individual insurance until you could qualify for Medicare or Medicaid. You'd need living expenses for the rest of your life, less any SSDI you could get.

If you can get SSDI, let's say for the sake of argument that you get 30% of your prior income, and it takes 6 months for your application to be processed. Let's also say that before you were injured you were saving 50% of your income but paying nothing for insurance.

You'd need: 50% of 6 months of your current income to match your prior living expenses, plus 2 years of health care expenses, plus 20% of income to supplement your disability income for the rest of your life. Let's us the 4% rule for that last piece: to get .2X forever, you'd need 5X today.

.5*60k/2 + (ballpark) 15,000 + 5(60k) = 330,000

Let's say that you can't qualify for SSDI. Then you need half your salary, forever, plus medical expenses, which will depend on your state's availability for Medicare.

30/0.04 = $750k plus medical.

TheInsuranceMan

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Re: Insurance Premium Guidance
« Reply #10 on: December 13, 2016, 03:28:16 PM »
Insurance professional here. I'm assuming you're in the US? Different countries have different liability laws, so that makes a difference.

Let's say that you cause a car accident that resulted in multiple serious permanent injuries, for a total liability of $2M. That's more than most people have in insurance or net worth, and far far more than the minimum liability limits of any state.

So, what would the recourse of the victims of that accident be? In order of easiest to most difficult:
-Your limits of liability, the full amount that the insurance company would pay. (Note: no deductible for liability.)
-Their own uninsured/underinsured motorist limit (Their insurance pays for losses they suffer because of an uninsured or underinsured driver. https://en.wikipedia.org/wiki/Uninsured_motorist_clause) Which they will subrogate against you for
-Their own personal injury protection coverage (Their insurance pays for their medical expenses. https://en.wikipedia.org/wiki/Personal_injury_protection) Which they will subrogate against you for (depending on state rules)
-They can sue you, and your insurance company is out of it because they already paid their limit. (Note: whether they'll defend you depends on a lot of factors.)

So, let's say that after exhausting the first three, they still have $1.5M in damages. That's a lot of money that they probably want to try to get, so they'll try to sue you. But you can't get blood from a stone, and you could easily declare bankruptcy, especially if most of your money is in retirement accounts or your house that would be considered protected assets.

Most likely, if your financial situation is not clearly well-off, any lawyer is going to advise not suing, because the cost just isn't worth the benefit.

And yes, they'll sue you.  Your insurance company, depending on who they are, should foot the bill to defend you.  On top of that, you can declare bankrucpty, as mentioned, set up payment arrangements, try to settle in a lump sum (not going to happen in the hypothetical example above, put a lien on any house you may own at the time (I've seen this done, might be state by state, or send the balance to collections.  Like they mentioned, you can't squeeze blood from a turnip, but everything I mentioned is possible (I worked in uninsured and underinsured subrogation)

**Edit to add:
Liability insurance, at least in my state, is stupid cheap.  Moving from 100/300/100 to 250/500/250 hardly costed me $200 more a year.  That is awfully cheap peace of mind.  If you can afford it, I'd go with a minimum of 100/300/100, which is the minimum we like to write in our office.
« Last Edit: December 13, 2016, 03:31:05 PM by TheInsuranceMan »

merula

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Re: Insurance Premium Guidance
« Reply #11 on: December 14, 2016, 07:06:49 AM »
Thanks for the additions InsuranceMan. The carrier can of course subrogate at their discretion, but you can't get blood from a stone, which is the whole point of UM/UIM and PIP anyway.

TheInsuranceMan

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Re: Insurance Premium Guidance
« Reply #12 on: December 14, 2016, 11:51:11 AM »
Thanks for the additions InsuranceMan. The carrier can of course subrogate at their discretion, but you can't get blood from a stone, which is the whole point of UM/UIM and PIP anyway.

Correct, but technically, they can still come after the un/underinsured person for those damages.  I know the company I worked for did it on all claims, and while the percentage of claims you collect on might be small, it still helps the companies bottom line.  The most fun was when I would get to work a UM claim in North Carolina, because all you had to do was send the police report to the DMV, and they'd suspend their drivers license.  Awww man, did I ever have some fun conversations there!  Iowa would pull DL's as well with proof of no insurance.

merula

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Re: Insurance Premium Guidance
« Reply #13 on: December 14, 2016, 12:34:08 PM »
Correct, but technically, they can still come after the un/underinsured person for those damages.  I know the company I worked for did it on all claims, and while the percentage of claims you collect on might be small, it still helps the companies bottom line.  The most fun was when I would get to work a UM claim in North Carolina, because all you had to do was send the police report to the DMV, and they'd suspend their drivers license.  Awww man, did I ever have some fun conversations there!  Iowa would pull DL's as well with proof of no insurance.

You're talking about uninsured drivers getting their license suspended, which I am 110% fine with. But we're talking about whether the OP should buy the minimum or something higher. You wouldn't be able to go to the DMV with a report that the at-fault driver bought the minimum coverage and caused damages exceeding that.

TheInsuranceMan

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Re: Insurance Premium Guidance
« Reply #14 on: December 14, 2016, 12:44:06 PM »
Correct, but technically, they can still come after the un/underinsured person for those damages.  I know the company I worked for did it on all claims, and while the percentage of claims you collect on might be small, it still helps the companies bottom line.  The most fun was when I would get to work a UM claim in North Carolina, because all you had to do was send the police report to the DMV, and they'd suspend their drivers license.  Awww man, did I ever have some fun conversations there!  Iowa would pull DL's as well with proof of no insurance.

You're talking about uninsured drivers getting their license suspended, which I am 110% fine with. But we're talking about whether the OP should buy the minimum or something higher. You wouldn't be able to go to the DMV with a report that the at-fault driver bought the minimum coverage and caused damages exceeding that.

Oh, I know that, I was just going off on a tangent remembering my days of getting yelled at, called names, and threatened :)

As we both agree, state minimums are a bad idea, as liability insurance is relatively cheap (depending on your driving record..)

Gin1984

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Re: Insurance Premium Guidance
« Reply #15 on: December 14, 2016, 12:51:33 PM »
How old are you, or, how close are you to FIRE?

Worst case scenario is an accident that leaves you with large, ongoing medical expenses and prevents you from working. Let's say that either you were at fault and uninsured, or the at-fault driver was uninsured and you didn't have any coverage for yourself (UM/UIM or PIP), so you're SOL. What would you need?

Well, if you're FIRE, not much. You would probably qualify for Social Security Disability Insurance (assuming you participated in SS while working), which would be income you weren't planning on getting before the accident, AND you'd be eligible for Medicare after two years of SSDI, so that takes health care costs out of your budget. You'd probably have some increases costs of living (can't bike everywhere because of injuries, need new house to accommodate a wheelchair, possibly need home health aides), but other costs would likely be lower (travel?), so you could probably find a way to work everything out without any insurance payments. And since my motto is don't insure what you can afford to replace, I would probably say you'd be good with just the minimum liability.

But you say you have a net worth of $35k, so I'm going to take from that that you're not close to FIRE. If you couldn't work and had large, ongoing medical expenses, what would you need?

Well, you'd need a few months of living expenses while you qualified for SSDI, if you even qualified. You have to have paid enough into the system to collect SSDI, so if you're very early in your career, you might not get anything. If your health insurance is from your employer and you can't work, you'd need money to pay for COBRA and then individual insurance until you could qualify for Medicare or Medicaid. You'd need living expenses for the rest of your life, less any SSDI you could get.

If you can get SSDI, let's say for the sake of argument that you get 30% of your prior income, and it takes 6 months for your application to be processed. Let's also say that before you were injured you were saving 50% of your income but paying nothing for insurance.

You'd need: 50% of 6 months of your current income to match your prior living expenses, plus 2 years of health care expenses, plus 20% of income to supplement your disability income for the rest of your life. Let's us the 4% rule for that last piece: to get .2X forever, you'd need 5X today.

.5*60k/2 + (ballpark) 15,000 + 5(60k) = 330,000

Let's say that you can't qualify for SSDI. Then you need half your salary, forever, plus medical expenses, which will depend on your state's availability for Medicare.

30/0.04 = $750k plus medical.
Given that most advisers recommend having $250,000 for medical now for retirees ($10,000), I would not assume medicare covers all expenses.

merula

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Re: Insurance Premium Guidance
« Reply #16 on: December 14, 2016, 03:00:43 PM »
Given that most advisers recommend having $250,000 for medical now for retirees ($10,000), I would not assume medicare covers all expenses.

Eh, every financial advisor I've ever met has made asinine statements like "Your expenses in retirement will be around 80% of your current income" and "I can beat the market", so I put exactly zero stock in their recommendations.

And I stand by my statement that being eligible for Medicare earlier than you otherwise expected lowers your expected healthcare costs significantly.


Gin1984

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Re: Insurance Premium Guidance
« Reply #17 on: December 16, 2016, 09:16:28 AM »
Given that most advisers recommend having $250,000 for medical now for retirees ($10,000), I would not assume medicare covers all expenses.

Eh, every financial advisor I've ever met has made asinine statements like "Your expenses in retirement will be around 80% of your current income" and "I can beat the market", so I put exactly zero stock in their recommendations.

And I stand by my statement that being eligible for Medicare earlier than you otherwise expected lowers your expected healthcare costs significantly.
It will lower it, that does not mean it removes it.  Ever heard of medicare part D?