There are several methods for calculating how much liability insurance to buy. Below we discuss three of the more popular methods.
1.Life value method. With this approach you purchase enough comprehensive liability insurance to equal your present net worth (assets minus liabilities) plus the aggregate value of your future earnings. For example, if you expect to earn an average of $25,000 for the next 40 years ($25,000 x 40 = $1,000,000), and your present net worth is $100,000, you should buy $1,100,000. The idea behind this approach is the very logical point that you cannot be successfully sued for more than what you have and what you will earn.
2.Net worth method. This method assumes that future income will not be attached to fulfill a claim. Therefore, buy just enough to cover your present net worth. While this would be the least expensive approach, it also is based on the potentially very weak premise that courts will not assess future income. Courts certainly have, and there is no reason to expect a change in the near future.
3.Jury awards method. With this approach you try to insure sufficiently to cover awards being assessed by local courts. For example, if the largest award for a bodily injury case in your area is $1,000,000, then insure to that amount. The problem here of course, is that new, higher awards are always being made. Also there are many factors that influence an award. Things such as pain and suffering, amount of permanent disability, past and future income, past and future medical bills, family and dependents, and much more make it virtually impossible to compare even what appear to be similar injuries and awards.
It's not recommended that you spend inordinate time worrying about coming up with an exact figure for your liability coverage. Typically, $100,000 or more is included automatically with your homeowners policy. Increases in that amount are relatively inexpensive. Your agent should be able to give you a good ballpark figure.