Function

• The purpose of auto insurance liability limits is to make auto insurance a predictable risk for insurance companies as well as to provide options for drivers. For insurance companies, the liability limits prevent the possibility of a few large liability accidents from destroying the averages that are necessary to effectively price and market insurance. For the driver, liability limits give the option for getting an affordable policy. Lower limits lead to lower premiums.
  
  

Significance

• The liability limit does exactly what it says, it limits the overall liability of the insurance company. A liability limit of $100,000 for example prevents the insurance company from paying out more than $100,000 for that incident. This limit may leave the driver with uncovered liability and thus, in the case of a sizable judgment, with their assets at risk.
  
  

Considerations

• Because the liability limits on auto insurance limit the insurance company's payout and not the potential liability of the driver, select appropriate limits. The cost of insurance must be taken into account as well. A policy with the minimum limits is better than no coverage at all, but is likely to not be sufficient if an issue does arise. For drivers who own their own home, or have other sizable assets, higher limits are necessary. If a driver has an incident from which a judgment of $300,000 is awarded and the driver has only $50,000 in liability coverage, it is likely that the driver's home equity (and thus the home itself) may be in jeopardy.
  
  

Misconceptions

• There are different types of auto insurance coverage. The liability limits apply only to situations in which the driver is responsible for compensation to another party. These limits do not apply to damage to the driver's car or property within the car, or in rare cases, damage to the driver's own property.
  
  

Size

• Auto insurance liability limits are usually constructed in parts. These parts are often expressed in writing as three numbers (expressed as thousands) usually separated by slashes with the first number being the per person injury limit, the second number being the per incident injury limit, and the third number being the property damage limit. So, a $100/$300/$50 policy would provide $100,000 of liability coverage per person for bodily injury, up to a maximum of $300,000 of coverage for all persons total for each incident and $50,000 of coverage for damage to property.
  
  

Geography

• Many states have minimum levels of coverage required by law for drivers in that state. Most states require that drives have at least some liability insurance to drive in that state.
  
  

Expert Insight

• Generally, the higher your assets the larger liability limits you need. For example, if you have limited savings and do not own your own home, there is little motivation for someone to pursue additional court action after having topped out your liability limits. This does not mean you should just take the minimum. You can still be liable and it can hurt your credit and cause trouble down the road if you have a very low limit and are found liable for a larger amount. If you do own your home or have significant savings, then higher limits are a must because an injured party will find it worthwhile to pursue the assets. Home owners should consider minimum limits of 100/300/100 while those with significant assets or a high value home might consider 250/500/250. Above this value, it might be cheaper to purchase an umbrella policy instead of buying more auto insurance.