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Why You Need to Know Your Net Worth

Determining Your NetworthDo you know your net worth?  If you are like most people, the answer is no.  But it is very important for people to know their net worth because so much of your financial life is dependent on it.  For example, how do you know how much auto insurance coverage or Homeowners/renters insurance coverage you need if you do not know your net worth?

To give you an example, let’s say “Steve” has a net worth of $250,000, but is unaware of his worth and purchases auto insurance coverage of 50/100/25.  This type of auto policy will cover up to $50,000 bodily injury expenses per person, with a $100,000 per occurrence limit for all bodily injuries sustained in a car accident, and $25,000 property damage limit.  Steve gets into a major car accident that is determined to be his fault.  The injured parties in the other vehicle sustained over $200,000 in bodily injuries. The following claims were filed by the injured parties in the other vehicle: Susan sustained $78,000 in bodily injuries; Bill sustained $53,000 of bodily injuries; Mark sustained $67,000 of bodily injuries; and Michelle sustained $22,000 of bodily injuries. The total bodily claims submitted is $220,000.  Steve’s insurance would only cover $50,000 of medical bills per person, with a $100,000 per occurrence limit. This means that Steve is underinsured by $120,000.  And what happens when someone is underinsured?  The injured parties will then sue for the $120,000 deficit, which puts Steve’s personal assets at risk.  It’s important to note here that the insurance company will only cover the limits specified in the auto policy, regardless of the number of people injured in a car accident.

How could Steve have prevented something like this from happening?  There are two options.  In the first option, Steve could have purchased a better auto insurance policy, something such as 100/250/100 policy, which covers $100,000 bodily injuries per person, $250,000 bodily injuries per occurrence, and $100,000 property damage.  This policy would have covered the bodily injuries of all parties involved without putting Steve’s personal assets at risk.  Another option would be to have an umbrella policy of $1 million dollars, which can be purchased for as little as $250 per year.  Once Steve’s auto insurance coverage was exhausted, then the umbrella policy would kick in and cover an extra $1 million above and beyond the auto policy limitations.

Do you know your exact net worth?  Do you know if you have adequate auto or homeowners/renters insurance to protect your assets?  If not, I strongly suggest calculating your net worth and checking your insurance policies to make sure you are protected. We all work hard to build wealth.  Don’t let something so small put you at risk of losing everything you’ve worked so hard to gain.

By the way I have a free Net Worth  Calculation Worksheet available to all PFM Community Members. Find Out more about joining here

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About Peter Serrano

Husband, Financial Blogger, Investor, Chef and Doggy Dad. Helping you take charge of your finances, build true wealth and live a better life today. READ MORE

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