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I cannot calculate the number of times I heard this question. Oftentimes it resulted in a good conversation about insurance and what it does for you.

I am a firm believer that the importance of this question lies in an interest to protect oneself from a 'worst case' incident. What is the worst case? For a homeowner, how about an accidental drowning at a birthday party? Maybe a driver swerves to avoid a dog, loses control and hits a pedestrian instead. Both tragic. Both carry the potential of substantial loss to the insured.

Follow along with this simple exercise to aid in finding a comfortable protection limit. Imagine a treasure chest sitting next to you. In that treasure chest imagine your valuables inside. Think about your money and savings held in the bank or credit union. $1000, $2000, $10000, or $100,000. That floats in there. Imagine your stocks, bonds, and mutual funds. $10,000, $50,000, $100,000 or more. Float that in there too. Don't forget to float the equity in your home (s) and or rental properties. For some this number alone can be substantial. Put your equity in the treasure chest too. How about your possessions? What would it cost to fill your house or apartment again? These items are subject to seizure and auction. Add up your treasure chest total and hold that thought.

Now go for a drive in your car. But before you go, pick up your treasure chest and put it in the back of your car. Wherever you go that treasure chest goes with you. It is raining with low visibility and you hit or kill a pedestrian. What do you stand to lose in the event of a lawsuit? Your treasure chest. At a minimum your liability insurance on your auto or home should meet the value of your treasure chest.

Do you have a gap in your insurance? If your treasure chest has $50,000 in it and you are driving around with $15,000 in liability protection, you have a gap. If your gap is substantial, there are ways to cover the gap with both your insurance and supplemental protection. i.e. an umbrella policy. Does this exercise get you 'enough' insurance. No. I don't know that there is a 'perfect' solution to 'how much is enough' question. There are other factors to consider, but this gets you started, and hopefully gets you better protected for the catastropic loss.

Some other factors that may change your calculations are your job and income level, (wage garnishment), or retirement account balances. Retirement accounts have many different factors, they can be ERISA protected, or non-ERISA protected. A non-ERISA account can be subject to garnishment in certain cases. To properly protect your retirement balances you should review your protections with both your insurance agent and an attorney.

A notorious example of lack of protection, and protection of assets, was the OJ Simpson civil trial. When his case was closed, he lost everything from the clothes in his closet to the money in his bank. The reason he is living comfortably in Florida is most likely an ERISA protected retirement plan.

This exercise is a good tool for both the 'do it yourself' insurance shopper, and the 'agent oriented' insurance shopper. When going it alone you have a basis for a coverage decision, and when working with an agent you have some points to start your conversation. More importantly, you can stay protected which is really what insurance is about.