Auto Liability

Auto insurance protects you from lawsuits, not from dents.

Most states require liability coverage, but the minimums are laughably low. Many states set the floor at $25,000 per person for bodily injury. If you cause an accident that puts someone in the hospital for a week, the bills will blow past $25,000 before they leave the ICU. The gap between your coverage limit and the actual damages comes out of your pocket — your savings, your investments, potentially a lien on your house.

The one principle applies directly here: insure against the lawsuit that could wipe you out, self-insure the fender bender your emergency fund can absorb.

The Bottom Line

Carry liability limits well above the state minimum — $100,000/$300,000 in bodily injury is a reasonable starting point. Raise your collision and comprehensive deductibles to $1,000 if your emergency fund can handle it. If your car is older and paid off, consider dropping collision entirely. Once you have real assets, add an umbrella policy on top.

Get the Liability Right

$100,000/$300,000 in bodily injury coverage is a reasonable starting point. The cost difference between minimum coverage and adequate coverage is often $20 to $40 per month. That’s a trivial premium increase to protect against a six-figure lawsuit.

If you’re building toward financial independence and your net worth is growing, your liability exposure grows with it. A $500,000 portfolio with $25,000 in liability coverage is a target. Consider the liability limits a floor that rises with your net worth, and add an umbrella policy once your assets justify it.

Raise Your Deductibles

Meanwhile, raise your collision and comprehensive deductibles. If your emergency fund can handle a $1,000 repair, set your deductible at $1,000. The premium savings from a higher deductible partly offset the cost of better liability coverage.

This is the self-insurance principle in action. You’re accepting more out-of-pocket risk on small claims (which your emergency fund covers) in exchange for lower premiums and better protection against catastrophic claims (which could ruin you).

When to Drop Collision

If your car is older and paid off, consider dropping collision coverage entirely. You’re paying premiums to insure a depreciating asset. When the annual premium exceeds 10% of the car’s value, the math stops working.

A 10-year-old car worth $6,000 with collision premiums of $700/year is a bad bet. That $700 goes further invested in an index fund than it does insuring a car the insurance company would only pay $6,000 to replace. Let the emergency fund handle it.

People who reach financial independence early tend to drive boring cars for a long time. The insurance savings compound alongside the purchase-price savings.

Not Financial Advice

This content is educational, not personalized financial advice. Insurance needs vary by individual circumstance, state requirements, and driving history. Consult a qualified insurance professional before making coverage decisions.