We’ve talked about all the different types of auto insurance. I’d like to now talk about whether you should get an umbrella policy given this was the most brought up next step in the comments section. An umbrella policy is also known as a personal liability insurance.

When you’ve spent a lifetime building assets for your retirement, the last thing you want is to get sued for all your’re worth. Accidents happen all the time and the more you are worth, the more the injured person will go after you. If someone in a $160,000 Porsche 911 Turbo GTS runs you over after running a red light, you’re probably more inclined to hire a lawyer and sue for big bucks than if you were run over by a 1985 Honda Civic!

Auto insurance policies only cover so much. My auto insurance policy has a maximum $500,000 liability per accident. I could get more liability, but the increase in premiums would make my insurance less worthwhile. My car is only worth about $5,000 max. Because I have assets over $500,000, I elected to get an umbrella policy to cover the rest of my net worth.

The chances of getting sued for over $500,000 is slim because: 1) I’ve got to be found negligent in the accident, 2) I’ve got to create massive damage in the accident, 3) The victim needs to go through the process of suing, 4) The victim needs to win, 5) Cases are usually settled out of court for less, 6) I drive half the national average, 7) I’m a pretty careful driver with a slow car, and 8) I’m a nice guy! Unfortunately, even nice guys get unlucky sometimes.

If I do get sued for say $1 million, I’m safe because my auto insurance coverage will kick in to pay the umbrella policy deductible, and then my umbrella policy covers me for the rest. The picture above illustrates the point clearly. The only out of pocket expense I incur will be my auto insurance deductible of $1,000.

SCENARIOS WHERE AN UMBRELLA POLICY MAKES SENSE

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The following post is sponsored by SelectQuote, based in San Francisco. They’ve been around for over 30 years, and I had the opportunity to sit down with their CEO for an hour to talk about his business and how they’ve managed to grow for so long. 

After giving folks a heads up about a common bait and switch tactic in the life insurance industry, I was asked by a number of people why I’d waste my money on life insurance premiums if I’m financially independent. It’s a good question that merits a deep dive because many of you will face the same dilemma once your passive income can cover all your living expenses or once your net worth reaches 20X your gross income. After all, you’re one of the few who care enough about your finances to read this site!

But I’m a little surprised why the folks asking couldn’t think of the many reasons why life insurance might be necessary after reaching FIRE. I guess if you haven’t reached FIRE, don’t have a family, or have never sat down with an estate planning lawyer, it’s hard to know.

Here are some reasons why life insurance is a good idea despite being able to self insure. You can click on the audio version if you scroll to the bottom.

Now that I’m a father, one of the first things I did was call up my life insurance provider to review how much life insurance I have and go through the various term life insurance options.

I was reminded of an existing $1,000,000 term life policy that’s expiring in five years. It was taken out 10 years ago when I was thinking of getting married. I figured, given I had about $1,200,000 in mortgage debt from buying a single family house, it was best to cover such liability so my future wife wouldn’t be financially burdened if I passed.

Now I’ve got 22 years to consider before my son graduates from college. Therefore, I decided to get a quote for a $2,000,000, 25 year term life insurance policy that came out to $181/month with my existing provider. Better to lock down a quote now before anything unhealthy happens, causing my premiums to skyrocket.

Unfortunately, because of the size of the policy, I was required to get my blood drawn, piss in a cup, and do an EKG. I hate getting blood drawn. It’s frankly one of the main reasons why I didn’t want to get a $1,000,000+ policy in the first place. But life insurance isn’t for me, it’s for my family, so I proceeded.

Before I sold my house in the Marina district of San Francisco, I always had a slight worry whether it would survive the next big earthquake. The Marina district, although a highly desirable neighborhood in the north end of San Francisco, is mostly underlain by saturated silts and sands that may liquefy if another large earthquake hits.

The last big earthquake was the Loma Prieta earthquake on October 17, 1989 which killed 63 people, collapsed a section of the Bay Bridge, and caused several buildings to burn down in the Marina due to ruptured gas pipelines.

Each time I got the mandatory earthquake insurance offer in the mail, I passed because the deductible (10% of value of home) was so high and the premium ($5,000+/year) so expensive. I’d ignore the risk I was taking until I’d get the same offer in the mail the next year. I figured worst case, I’d have to spend $650,000 rebuilding a 2,300 sqft structure.

Now that I don’t own a home surrounded by liquefaction, I do feel a sense of relief that I “escaped” almost 13 years of ownership without experiencing a natural disaster. So many people who didn’t live in San Francisco constantly reminded me about the risks of earthquakes before I bought. Then after I bought, so many more people from San Francisco who didn’t/couldn’t buy a home tried to instill fear in me.

What gives folks? Can’t you just be happy for someone’s largest purchase?

As a result of all this feedback, one of my worries was having an earthquake hit while I was in the process of selling my home. Selling a home is much more stressful than buying a home. If you don’t buy a home, there is no loss except for dashed dreams. If your home falls out of contract when selling, vultures will start circling.

With devastations seeming to happen around the country every year, I’ve begun to wonder whether it would be wise to look into flood and earthquake insurance again to cover my remaining properties. My homeowner insurance policy covers fire damage, and so should yours.

One of the most important insurance policies I have is my 20 year, $1 million term life insurance policy. I took it out on my 35th birthday because before then, I had life insurance through my employer based on 4X my base salary. I left Corporate America in 2012 at the age of 34 and now have to pay for all of my own insurance. Cherish your work benefits folks!

The reason why I have life insurance is because I have mortgage debt. But in 2017, I had my first child! So now I’ve upped my life insurance coverage further. In case of early death, I don’t want those who inherit my assets to feel any financial burden.

I’ll use my own example and share other examples as well to help you better understand the life insurance process. This post will go over:

• When to get life insurance.
• How long of a life insurance term to get.
• How much life insurance to get.
• A sample chart comparing costs based on different amounts and terms.
• Where to get life insurance.

After writing my post on life insurance needs when having a baby, a reader mentioned he was disappointed I didn’t mention Social Security survivor benefits.

What’s funny is that I never think about Social Security when planning for my financial future. We all know Social Security is underfunded by 20% – 30%, and the government will likely raise the minimum age of retirement or cut benefits to make the program whole.

Nobody should expect anything in order to save and earn as much as possible while able. But the reality is we’ll all likely get Social Security benefits if we live long enough – just not 100% of what’s expected.

Unlike knowing every single passive income stream amount by memory, I had no clue what Social Security benefits I’ll be collecting at an “early retirement age of 62,” full retirement age of 67, or at age 70, until writing this post. I’m betting most of you have no idea either.

Everybody should go to ssa.gov and find out how much money they plan to get from Social Security when they retire, and how much Social Security survivor benefit their spouse or child will get if they were to die early. The amounts seem like free money, even though we paid 6.2% – 12.4% in FICA tax for years into the system.