25/50/25: What Those Numbers Don’t Tell You

While most of us know that when we look at our policies, 25/50/25 refers to the policy’s limits, we have probably not thought about what this could mean in the case of an accident.  Policy limits determine the maximum amount your insurance company will pay in the case of a covered accident. This explains why you see them listed on your declarations page. They are outlining what your insurance will actually cover. What many of us have not thought about is why it would be important to understand these limits. The limits set out by your policy can be the difference between having enough coverage in the case of an accident or finding yourself completely underinsured and with a whole host of headaches in the case where the unexpected occurs.

What Does 25/50/25 Actually Mean?

Let’s say you cause a relatively minor rear end accident.  Nothing too extreme, just the two vehicles in front of you slowed down before you noticed and you ended up hitting the car directly in front of you and pushed it into the car ahead of it. Leaving aside your vehicle or injuries for now, the vehicle in front of you (we’ll call it vehicle 2) had one driver and two passengers, has some damage to the rear bumper and hatch and some front end damage from rear ending the vehicle in front of it. The vehicle ahead of vehicle 2 (we’ll call it vehicle 3) had just a driver, and also has some rear end damage to the bumper and trunk.

Your policy carries your state minimum of 25/50/25 limits and will be used to cover the damages resulting from the accident. The limits refer to:

·        $25,000 bodily injury maximum to be paid per person

·        $50,000 bodily injury maximum to be paid per accident

·        $25,000 property damage limit maximum per accident

In practical terms, this means that your insurance will cover up to a $25,000 maximum for any individual person injured in the accident.  In our example, if two of the people in vehicle 2 are injured, the maximum either person will receive to cover their bodily injury expenses is $25,000. If it turns out that the driver in vehicle 3 is also injured, then between the two people injured in vehicle 2 and the additional injured driver from vehicle 3, your insurance company will pay out a maximum of $50,000 for all injuries to all parties. Keep in mind this is a maximum payout, not necessarily a guarantee.

Going back to our example, the third number refers to the maximum amount your insurance company will pay for damages caused to the vehicles of the other two parties.  In this case, your insurance policy covers up to a maximum of $25,000 and it will have to cover the damage to vehicle 2 and vehicle 3.

Remember that these limits don’t apply to injuries you may have sustained or for any damage to your vehicle. These are liability or third-party coverages, which means they will only cover the damages or injuries caused by you to other parties.

What Most People Don’t Realize About These Limits

Bodily Injury

While the limits are neatly outlined on your policy, you have to think about how these limits would apply to your situation and also keep in mind how quickly that cap can be reached in the case where multiple parties are involved in an accident.

First, the limits are shared per accident. In our example, this means that the driver in vehicle 3 and the passengers in vehicle 2 all have to share the $50,000 between them. Let’s say that no one has serious injuries, all have claimed only soft tissue injuries like whiplash and bruising. The bodily injury coverage would apply to cover:

·        Medical treatment

·        Lost wages

·        Pain and suffering

·        Future care

This is why any injury settlement could easily exceed any hospital or medical bills.  While no individual would receive more than the $25,000 maximum, it is easy to see how between three people the limits could be reached very quickly. Trips to the emergency room, chiropractors, doctor’s visits, days missed from work because of the injuries and the ever-ambiguous “pain and suffering” all add up for each party injured in an accident. Let’s hope for our sake that in our example we are not covering lost wages for any higher earners like surgeons or tech executives!

Property Damage

The Anonymous Adjuster usually focuses on non-injury accidents and in this case where people often underestimate the meaning of a low limit policy. Going back to our example, we have two damaged vehicles with moderate damage. Think about the prices of vehicles when you go into any dealership today and the cost to repair a modern vehicle. This is what we are facing with a $25,000 limit.  Based on the type of vehicles involved (regular gas, electric, hybrid?), are they newer or older models, how significant the damage was  (is it enough to total either of the vehicles) you could find very quickly that between the repairs, rental and diminution in value typically owed under property damage coverage, your limit has been reached.

In other types of accidents, you could find yourself responsible for damages to fixed objects like walls or poles, or storage fees in cases where cars are rendered not drivable. Given the modern cost of living, in many cases minimum state limits can be exhausted by very simple accidents.

What Happens When I Hit My Limit?

When you hit the limits outlined by your policy, your insurance company will stop making payments.  Whether for bodily injury claims or property damage claims, the insurance company will not make any more payments to any more providers, repair shops or rental companies and the other parties will have to go through their own insurance to complete the expense or pay out of pocket.  The problem for you is this is where your personal liability would start. That means that since your coverage has been exhausted, you could become personally liable for any additional expenses covered by the other parties involved in the accident. While in many cases, these limits issues are worked out between insurers through underinsured coverages on policies, there are cases where you can end up with a lawsuit and a judgment that holds you personally responsible.

Common Myths That Can Lead to Costly Surprises

Myth #1: “I Have Full Coverage”

Many times when people file a claim, during the call where you go over coverages available to them on their policies, insureds will say that they have “full coverage.” Full coverage is not an insurance term and isn’t connected to any particular sets of coverage. Don’t assume that you have any coverage, review your policy and confirm that you have the coverages that you think you will need in case of an accident.

Myth #2: “Minimum Limits Are Enough for Most Accidents”

As noted in our example above, many times policy limits are exhausted quickly and may not be enough to cover the full damages from an accident. Keep in mind that the cost of living continuously rises, but insurance limits set by the department of insurance or the state legislature may not rise at the same pace to match new costs. Keep an eye on the costs in your area and review your coverages to make sure that you have enough to cover you financially for eventualities. What would have been appropriate coverage five or ten years ago, is likely not enough to meet today’s costs.

Myth #3: “I’ll Never Be Personally Sued”

While for relatively minor accidents insurance companies can often come to agreements when limits are exhausted, there are many cases where you find yourself ending up in court. A situation that happens even for relatively minor accidents is where the other party calls you to small claims court. This can happen when the other party is uninsured and your insurance company has denied liability. If this happens, ensure that you notify your insurance company as soon as possible, they may want to participate in your defense.

While our example covered a situation with a relatively minor accident that didn’t have significant injuries, the situation can change where you are found at fault for an accident with serious injuries involved. This type of situation can involve lawyers and where your limits have been reached, could you see you now financially exposed to judgments. You will want to consider this when establishing your limits especially when you have significant assets.

How to Evaluate Whether 25/50/25 Is Right for You

You should regularly review your policy limits to determine whether a change is needed. You will want to take into account what your risk tolerance, cost and to what extent you want to protect your assets. For example, you will want to evaluate what assets or income streams you need to protect.  Do you have business income you need to protect? A home that you own? Investment property or income? Would you feel comfortable paying the difference if your limits are exceeded? 

You will also want to evaluate how often do you drive and where. Do you drive a few miles a day and mostly in local traffic?  Do you move around in a high cost area? Are you frequently out on the road in heavy traffic?  When you think about your driving, think about what increased risks you could be facing as a result of your daily schedule.

You can always reach out to your insurance company to review your coverages and limits. This doesn’t require filing a claim and allows you to weigh different limits and costs associated.

The Role of Higher Limits and Umbrella Policies

When people hear “higher limits,” they often assume a dramatic increase in premiums. In reality, liability coverage is one of the most cost-effective ways to reduce your financial risk—especially compared to the potential exposure after a serious accident.

Why Higher Liability Limits Are Often More Affordable Than Expected

One of the least understood aspects of auto insurance is how little additional premium it often takes to increase liability limits.

• The difference between state minimum limits and higher limits (such as 100/300/100 or 250/500/250) is often far less than people expect
• Liability coverage is priced on risk, not vehicle value
• Increasing liability limits typically costs much less than increasing collision or comprehensive coverage

In practical terms, many policyholders find that raising liability limits costs only a few dollars per month, while dramatically increasing the amount of financial protection available. Consult with your insurance company if you want to find out more about the difference in pricing for the different coverage options.  You don’t have to file a claim to find out more information about your policy.

What an Umbrella Policy Is—and What It Requires

An umbrella policy is additional liability coverage that sits on top of your auto (and often homeowners or renters) insurance.

What an umbrella policy does:

• Provides extra liability limits, often starting at $1 million
• Applies after the underlying auto or homeowners policy limits are exhausted
• Can protect against severe injury claims, lawsuits, and large judgments

What many people don’t realize is that umbrella policies don’t replace your auto insurance—they supplement it.

Because of that, insurers typically require:

• Higher underlying auto liability limits (commonly 100/300 or 250/500)
• Higher homeowners or renters liability limits
• Proof those limits are already in place before the umbrella is issued

This means that if you have lower coverages on your auto policy (25/50/25) and umbrella policy may be available, or you may have that you have to increase your limits before they will consider issuing you an umbrella policy. Also note, that were your limits are low and you do have an umbrella policy, you may be uninsured for the gap amount between your auto policy limits and where you umbrella policy kicks in to cover losses.

Final Takeaway

When reviewing your policy for appropriate limits please take into account that insurance is a way for you to handle your risk.  What amount of risk could you reasonably absorb if something went wrong. You want to protect yourself and your assets from one bad day and a good place to start is by reviewing your insurance coverages. Now that you have an understanding of what coverage limits actually are, you are in a good position to evaluate your insurance policy and determine what is appropriate for you.

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This content is for educational purposes only and does not constitute legal or insurance advice.