How Auto Insurance Can Protect Your Retirement Savings

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Responsibility car insurance pays for damage you cause to other people and property in an accident. But if you don’t have enough coverage, a court judgment could force you to hand over everything, including your nest egg for those golden years. So how do you protect your retirement savings?

Nathan Mahlik, owner of a State Farm agency in Danville, Calif., Tells his clients that they can either have sufficient liability coverage or risk their future wages and assets.

Which pension plans are at risk

The Employee Retirement Income Security Act prevents creditors from getting their hands on certain “qualifying plans,” including retirement plans and 401 (k) s. But IRAs and some other types of retirement plans don’t have the same federal protection.

Traditional IRAs are protected from creditors to some extent in all 50 states and the District of Columbia. Some states give full protection to IRAs and Roth IRAs, but in California and Georgia, for example, part of an IRA can be withdrawn to satisfy a judgment as long as enough is left to support the owner’s household. . This “reasonably necessary” amount is determined on a case-by-case basis.

Roth IRAs are not protected in eight states: Alabama, California, Georgia, Hawaii, Idaho, Indiana, West Virginia, and Wyoming.

Money that has been withdrawn from a retirement account is generally not protected from creditors. In some cases, retirement assets may be at least partially protected if you file for bankruptcy, although this is a final decision.

How Much Car Insurance Do You Need?

The state’s minimum requirement for auto insurance is often insufficient to cover all judgments. In Florida, for example, state insurance minimums are $ 20,000 for injuries and $ 10,000 for property damage. Such quantities can be quickly used up. According to Jury Verdict Research, the median jury price for automobile liability was $ 34,877 in 2013. But there were enough larger awards to bring the average price up to $ 351,829.

Compare auto insurance quotes with NerdWallet auto insurance comparison tool.

Reducing your liability coverage is a mistake, as you and possibly your estate are responsible for paying for damages it does not cover.

To resolve your debt, a court could review the sale of your assets, garnish your salary, take your savings, and possibly operate your IRA if your state’s law allows it. In other words, you could lose everything you have, plus some of your future income, your retirement savings, or both.

It is a good idea to purchase liability insurance for an amount greater than your equity. This would help protect your retirement savings in the event of a major judgment against you.

A framework policy can fill in the gaps

Insurance companies impose limits the amount of auto insurance you can buy. A typical limit is $ 500,000 each for personal injury and property damage. But it is possible to purchase an umbrella policy, which adds additional liability coverage to your auto and home policies; it begins to pay after regular coverage has been exhausted.

Mahlik estimates that at least 70% of its customers have umbrella cover. It is relatively inexpensive. A $ 1 million umbrella policy can cost anywhere from $ 150 to $ 300 per year, according to the Insurance Information Institute.

Suppose your liability policy reached $ 250,000 and your net worth was $ 500,000. You could sell everything you own while still being well under a million dollar judgment. This could leave you vulnerable to wage garnishment and a lifetime of financial hardship. A framework policy could make the difference.

In other words, you wouldn’t have to empty your bank accounts, liquidate your assets, and sacrifice your retirement savings to get it right. Saving for retirement is essential, and protecting your savings is just as important.

Nerdwallet auto insurance comparison tool can help you compare prices.

Donna Freedman is a former editor of NerdWallet.


Image via iStock.


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