Imagine today is the first warm spring day of the year. The car windows are down and your favorite song is on the radio. While passing through an intersection (green light for you), you are broadsided by a man texting while driving. All he owns in the world is his now demolished car and he carries no car insurance. At the hospital the doctors determine you are permanently injured and can no longer work.
What happens now?
If you are like most people, you likely have auto insurance with matching liability coverage and uninsured/underinsured motorist coverage of $100,000 per individual. Since the driver of the other car is without insurance and without assets, you receive $100,000 from your uninsured/underinsured motorist coverage for your injuries and possibly some additional funds to fix your car.
Did that make you financially whole? Likely, that amount is not even close.
In the event of permanent disability, what is lost is the net present value of all of your future paychecks. Your paychecks are gone forever. Assuming you are in your 40s and earning a salary of $100,000/year, your financial loss due to the permanent loss of future wages is the rough equivalent of 15 times your income or $1,500,000. This calculation is called Human Life Value. In summary, you lost the equivalent of $1,500,000 and you were reimbursed with $100,000. For you and your family, this is an economic tsunami from which recovery is near impossible.
The reverse can deliver a similar negative effect. Using the same fact pattern, imagine you are momentarily distracted and you caused the accident. You are now being sued for $1,500,000 and your coverage is $100,000. Now you owe this family $1,400,000 (after the $100,000 from your car insurance) to pay the person you hit for their lost wages. Unless you win the lottery or are otherwise independently wealthy, the financial future of your family is irrevocably damaged. The solution is to own Umbrella Liability Coverage that protects your assets and future income from a similar event. Umbrella Liability Insurance typically costs about $15 per month for each $1,000,000 of coverage.
If your auto coverage is similar (or if you don’t even know what your coverage is), I recommend that you meet with your Property and Casualty Agent as soon as possible to review your uninsured/underinsured motorist coverage in the context of the above story and to ask about Umbrella Liability Coverage.
For a broader view on how this kind of event can impact your overall financial model, please contact me today to schedule a phone call, web conference or in-person meeting at my Alexandria, VA office.