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Buying Auto Insurance? Be Sure You Get Enough Liability

Auto insurance is as much about protecting yourself as it as about protecting your car: You can do a lot of damage with a 3,000-pound SUV traveling at 65 miles an hour, and you're far more likely to be involved in a car accident than you are to lose your home in a fire.

"It's hard to drive to work without seeing an accident," notes Jack Hungelmann, an insurance agent and author of "Insurance for Dummies."

But worry less about the car and more about yourself: Hungelmann recommends spending the most money on coverage for the kind of liability that could hurt you the most: personal injury. He says most people should have $1 million of coverage.

That may sound like a lot, but if you hit someone who earns $100,000 a year, putting that person out of work for five or 10 years or forcing them to change jobs, you might be sued for medical bills and lost wages.

Liability coverage of $1 million is generally sold as an umbrella policy covering your home and car. If you don't want to pay for that much coverage, Hungelmann recommends getting at least $500,000 of coverage for each.
The incremental cost of getting $1 million of coverage a year vs. $100,000 is relatively small, he says, perhaps $100 or $150 of premium.

If don't have that much cash, skimp on other kinds of auto coverage, such as damage to the car itself, and apply that savings toward personal liability coverage, he says. For example, take a $1,000 deductible – the amount you pay upfront before your coverage kicks in -- instead of $250.  Use the savings on personal liability.

"The worst kind of auto insurance has a low deductible and limited liability," Hungelmann says. "You're spending the same amount of money as someone with better coverage, but you're [doing a worse job of] allocating your dollars."

Types of Insurance Coverage:

According to the Insurance Information Institute, an industry trade group, your auto policy might include up to six kinds of coverage, each of which is priced separately.

Bodily injury covers damage that you as the driver or policyholder cause. It covers you when you are driving your car and when you are driving someone else's car with their permission.

Personal injury protection covers the treatment of injuries to you and your passengers. It may include lost wages as well as medical expenses.

Collision coverage pays for damage to your car as the result of a collision with another car.

Comprehensive coverage pays you back for loss that's attributable to theft or damage caused by something other than a collision with another car such as a natural disaster or a collision with a deer.

Property damage liability pays for damage you or another driver cause to someone else's car or anything else you hit.

Uninsured and underinsured motorist coverage reimburses you or another designated driver who is hit by an uninsured driver or a hit-and-run driver.

Allison Bisbey Colter is a freelance writer in New Jersey whose work has appeared in The Wall Street Journal and American Banker. She is a former editor at TheStreet.com and a former reporter for Dow Jones Newswires.

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