If you have an umbrella policy, you should learn how to maximize an umbrella policy. After all, an umbrella policy costs you premiums every year you own one.
If you have assets that amount to more than what your car insurance and home insurance coverage provides, then you should probably get an umbrella policy for protection. The amount of umbrella policy coverage you should have is an individual choice. If you want to be safe, get an umbrella policy equal to your estimated net worth.
I've personally taken a “riskier” approach by getting an umbrella policy less than my net worth. I figure, I'm not doing anything particularly offensive or risky in day-to-day life. Nor is my business putting anybody in physical danger. If I was running a roller coaster amusement park on the other hand, you bet your buns of steel I'm getting maximum coverage!
The point of this article is remind people to protect their assets. I also want you to have a talk with your insurance company since you're paying for coverage. Finally, make sure the insurance coverage is aligned to expectations. Spending a lifetime of work only to see it get wiped away by some random act would be unfortunate.
How To Maximize An Umbrella Policy
Having lived in America for over 25 years now, it's clear America is the greatest country on Earth. But even the greats, have problems. For example, with over 150 million orphans in the world, there are still families who decide to have 10 kids! How about adopting at least one for every five to help alleviate some suffering if you care about kids so much?
The United Nations Food and Agriculture Organization estimates that about 805 million people of the 7.3 billion people in the world are suffering from chronic undernourishment. Despite this staggering number, it's as if Americans don't give a crap. If we did, there wouldn't be 79 million obese Americans (35% of the population) according to the CDC and the Journal of American Medicine. We'd be much more mindful of what we eat.
It's fruitless to try and change the world. You'll just get frustrated or make other people angry. As a personal finance blogger, all I can do is publish things I believe in based on experience that may help others. If you don't like the advice, you can click away in a jiffy.
Every year I call my insurance company to go over my coverage. I ask them to clarify my umbrella policy with various scenarios. The great irony of owning an insurance policy is that you're winning and losing at the same time if you never use your policy. The longer you pay your premiums without an incident, the more your insurance company makes. Here are a couple questions I asked that raises an interesting scenario.
Q&A With Umbrella Policy Insurance Company
Question: Let's say someone in my household gets sued for the maximum amount my umbrella policy covers e.g. $3 million. Does that mean if I get sued the very next day, I no longer have umbrella policy coverage since its already been used up by another household member?
Answer: No. Your umbrella policy covers each person in the household per incident for up to $3 million. In other words, if you get sued the next day, you will also be protected for up to $3 million.
Intrigued, I follow up with another question to clarify.
Question: Let's say I have 20 people living in my household. Are you saying that I theoretically have $60 million in umbrella policy coverage if each person gets sued in separate incidents?
Answer: Wait a minute, you have 20 people in your household?! (I explained I was just asking in such a scenario as an example). Yes, theoretically each member of your household would get umbrella coverage.
My umbrella policy insurance woman NEVER explicitly said the words “$60 million in coverage” as she was in shock that I was asking such a thing. She couldn't understand that I was just providing an extreme scenario to clarify a point. She also didn't want to be caught on a recorded line saying I am eligible for a $60 million umbrella coverage either. Instead, she kept on asking me if I had 20 people in my household.
The Umbrella Policy Is Good Value
If you are an American taxpayer who is worried about the cost of children, don't be! All those articles about how it costs $250,000 – $1 million to raise a child from birth until adulthood are bogus. If they weren't, why do you see large families survive just fine on median household incomes?
Because the government wants each American to own a home, they've provided the mortgage interest deduction and tax-free real estate profits as a way to lure renters in. The government also wants you to have lots of children because the population growth rate is slowing. If the government didn't, then why would they institute a marriage penalty tax that encourages one high income earning spouse to stay at home? The tax is ludicrous as you'll see after reading the multiple income scenarios I inputted.
If you're a single individual paying lots of taxes, you're kind of getting screwed. By having a large family, you become the beneficiary of child tax credits. You get government subsidies. Further, you get benefits paid for by other tax payers. For example, there are homeowners who pay property taxes who don't even have kids, yet their property taxes go towards funding public schools. That's good for society, but what about just taxing/charging people who utilize the facilities instead?
Insurance Companies Approve Larger Families
Even insurance companies are supportive of large families by charging the same price for an umbrella policy coverage whether you have one person in your household or 20. Why not give a premium discount for smaller families or charge per head instead? That would be too logical.
I just want to have a discussion with the community about the importance of insurance coverage. Please ask your insurance companies various scenario questions. It's good to know what happens in various circumstances. The last thing you want to happen is for your insurance company to say, “SO SORRY! You are not covered,” when you need them most.
Related: How Does An Umbrella Policy Work?
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Insuring only to the extent of your assets may not always be prudent. In most states, a judgment will be enforceable for at least twenty years, and often longer. Therefore, it’s not just your current assets that are at risk, it is also your future assets and income. Yes, in many places your income (beyond a small exempt amount) can be garnished to satisfy a judgment. While it is true that often there will be a settlement for the policy limits and therefore insuring for $300,000 or $500,000 or even $1 million may be enough for the average person since a plaintiff can’t get blood out of a stone, FS and many of his readers are or will be far above average and therefore now have or will have a lot at risk. I do know of situations where people have had insufficient insurance and have had to pay personally out of their own insurance to resolve a suit with serious personal injuries. Also, it is not much more expensive to have a $3,000,000 umbrella as compared to a $1,000,000. Each incremental dollar of coverage gets cheaper as the limits go up because frequency of a catastrophic loss is less than frequency of a less serious loss.
Also, having adequate insurance is also about doing the right thing. None of us is perfect and all it takes is a split second mistake or distraction that could lead any of us to cause a serious accident. If, heaven forbid, I caused an car accident where a child was injured and rendered a paraplegic or suffered a traumatic brain injury, wouldn’t I want to know that while I could not undo the damage, I at least hadn’t been cheap on insurance and there was a source of compensation.
May we never need the insurance we purchase.
Agreed. May we never need the insurance we purchase, and may the insurance we purchase kick in if we are wronged!
Choose the amount of umbrella coverage depends on the individual. Something is better than nothing, especially if you have multiple people in your household who you don’t know exactly what they are doing at every single moment of the day.
During law school I was home for interviews for a summer clerkship and driving my parents’ old car to an interview that was a source of a great deal of stress – rear ended a car in front of me on the freeway and caused a 5-car collision on the freeway! Fortunately I was still still considered a dependent and their umbrella policy covered everything (which was not a small amount). I feel in some weird way blessed for that experience because I’ll never be without such a policy for the rest of my life, including even when I had just graduated and had a tiny networth but a good income with upward potential,
I wanted to really thank you for this article. I have a short term vacation rental property in Florida and until today had a general house policy with $300k of liability plus a separate $1M liability umbrella. After reading this article decided I am underinsured based on net worth of several million and just increased the umbrella to $3M.
The house has a pool and spa and that is my real concern. I’ve never had an issue of any kind but it only takes one accident. I also recently bought some signs to put out by the pool. One says NO DIVING and the other is a list of pool rules including no alcohol, no horseplay, etc. Ugly signs but I need to protect myself.
Great website.
Hi Chris,
I’m glad you were able to get away with $1M liability umbrella so far with no problems, and now feel more comfortable with a $3M policy! Peace of mind is priceless, and it’s always a good idea to do an assessment of one’s net worth once a year to make sure insurance coverage is appropriate. A pool definitely is a liability creator, so I’m glad you’re covered.
Best, Sam
Your comment: “That’s good for society, but what about just taxing/charging people who utilize the facilities instead?” is a sentiment I’ve often heard from the singles and childless couples. But what you are missing is that you, indirectly, use those facilities in the sense that the “good of society” is YOUR benefit. You get cops who police your city, troops that protect your borders, baristas who make you coffee, auto-workers who build your cars and workers who pick your fruit. Sure, part of the price for these services are borne by you more directly in taxes, but the cost to birth, educate, inoculate, train and a myriad of other tasks that society covers on your behalf need to be taken care of as well. Or would you prefer to leave in an uncivilized world?
I agree with you. As someone who donates to my local library, writes free personal finance content for others to better their finances (think if everybody learned to be responsible with their borrowing or didn’t overstretch to buy a house), and an annual six figure tax payer, I’m all about helping out society for the good of everyone. The question is: how much is not enough and how much is enough?
The answer to your question and conclusion to this post is to exactly have lots of children because you get a lot more benefits back than if you were childless.
The only problem is, once we all have lots of children, and don’t pay according to our use of resource, then what happens?
Your comment and the way society works has helped me overcome the guilt of not paying as much taxes as I once did, and also ignore the millions of orphans out there without a stable home. Instead, you’ve help embolden me to think more about myself.
I have no children, and even if I don’t ever have children, I will benefit substantially from living in an area where almost every child born winds up with a third grade math and reading ability. (Imagine what it would be like to live and work in an area where 75% of people didn’t have basic abilities like those. How much more would I have to pay (in money or annoyance) for groceries in a society in which a. most grocery store employees are illiterate and work accommodations are made accordingly or b. grocery store employees are among the 25% most highly educated members of society?).
I would benefit even more if the public school system were so good that 90% of children grew into adults capable of, say, answering comprehension questions about an article in the New York Times and understanding how to create and when to use basic excel formulas. My beef with the public school system is level of rigor (in middle school and high school), not its existence or the fact that the childless have to support it. Parents may get more benefit, but I still get a huge benefit. (The biggest benefit, of course, goes to children, but they can’t exactly be expected to pay their own way except retroactively in adulthood).
Also: sorry if this sounds to snarky. I don’t mean to be, and my suspicions based on your other posts are that you fully support the existence of public education.
Wow. Great point about paying retroactively for our own education. I never think about it that way, but that really resonates with me. And I totally agree that there are benefits to providing other people’s children with an education. The health of the economy–and more particularly, the social security system–depends on other people being educated and earning money, too.
For an insurance novice like myself I would also like clarification on what an Umbrella Policy is. Is it just an overall dollar amount of coverage for everything you own? So it would replace having individual policies for home, car etc?
Hi Matt – Check out How Does An Umbrella Policy Work And How Much Does It Cost. The post was embedded at the end of this current post. Makes me wonder if I should place “related posts” higher up so they are more visible?
Hi Sam,
I own several investment properties, a primary residence and drive a semi-fast car. I’ve been sued in the past by an intoxicated person that tripped at one of my properties and broke a foot. They won close to 200K. Thankfully, the insurance covered it, but I’ve been pretty paranoid since. Currently, I have 2 different insurance companies (one for all of the rentals and another one for the car). If I get an umbrella policy, would it have to be from the same company that covers my rentals, or can I go with another company? Consolidating the insurance under one company almost doubles my car insurance.
Yikes Jim. Some drunk person tripped, broke his foot, and won $200,000 from you? I guess there is more to the story yeah? That is pretty concerning, and probably makes lawyers and insurance companies giddy that such stuff occurs to keep them in business.
I think you can go with a different insurance co, but why not see if you can get a better rate, and more seamless coverage with the co that insures your rentals and keep the car insurance separate?
There are many insurance companies that can write umbrella coverage even if they do not have your underlying policies.
If you are currently working with a captive insurance carrier (Allstate, State Farm, Farmers) the first step I’d recommend is finding a good insurance broker.
I currently have Farmers for all of the rentals and to add an umbrella policy, they require all policies to be combined under their roof (including auto). Any recommendations for an insurance company that would just provide the umbrella policy? I’m quite happy with Farmers.
As far as the lawsuit, they settled before it went to court. It happened at night and apparently there wasn’t enough light illuminating the driveway.
First of all, in order to get a million dollar umbrella you need to be at the max liability for your individual policies (500k), so “get the minimum” doesn’t work (I’m not in the insurance business but I believe that’s how it works). Secondly, back to my original question, if my son is no longer a dependent, he just lives with me, how am I responsible as head of household if he runs over a jay walker?, he is an adult and files his own taxes etc. and has no legal rights to my assets. Realizing that lawyers always go after the deep pockets, and anyone can sue anyone if they can get a lawyer to do it, it doesn’t mean they always win. Lastly, I also believe that retirement assets (including 401k, IRA) is not accessible from lawsuits, remember OJ living nicely in Florida after he lost the civil judgment to the goldmans (until he couldn’t help himself in Vegas), they couldn’t touch his NFL pension, so the umbrella need not cover your entire net worth, just the judgementable part me thinks.
If your son is no longer a dependent, how can he live with you? Isn’t that a conflicting statement?
Not necessarily true to: “max liability for your individual policies (500k)” There are umbrella carriers that will write an umbrella policy even if your underlying coverage isn’t maxed out, provide you meet their other underwriting guidelines.
Few additional points I hope clarify:
If your son is regularly operating your vehicles and living with you, he should be included on YOUR auto policy and subsequently under your umbrella.
If he lives with you, and you want him included for coverage under your umbrella, then he should carry your insurance carrier’s minimum underlying limits.
If as you say, he has no assets, can’t afford insurance, etc., why worry about giving him umbrella coverage under your policy? If you aren’t on title to his vehicle, there’s a slim chance you’d get dragged into a lawsuit simply for owning the roof over his head. Just make sure that if he drives one of YOUR vehicles, YOUR auto insurance extends coverage for him. On that topic, make sure your auto insurance includes “permissive use” for anyone that may happen to drive your vehicle.
Suppose I rent an apartment, have a car, and have a net worth of $1 million. Can I still get an Umbrella Policy even though I have no homeowner’s insurance? Do I need to get renters insurance first?
Your car insurance should have a minimum liability amount and your umbrella should kick in after as a secondary defense. I’d double check with your insurance company. Everybody should be having a discussion with their insurance co after reading this article!
I’d get renter’s insurance. It doesn’t cost much and protects you from further liability as well. Insurance cos will give discounts of you have multiple insurance products with them.
You will need to get a renter’s insurance policy first. Depending on the carrier you select, they will require $300K or $500K in underlying liability coverage. Umbrellas are meant to supplement underlying coverage, not be the first policy claimed against.
very timely for me. I am in the process of renewing my umbrella and was sent the standard “verify nothing has changed” request plus provide current copies of declaration pages of existing policies etc.. I sent the requested info along with “BTW, my son just graduated from college in December and while he still lives at home for the moment he now has his own car insurance, here is his declaration page”. The response was that in order to maintain the umbrella my son needs to up his minimum coverage to the maximum (500) matching my policy, to which I replied “that’s ridiculous, he has no assets of his own and he can not afford the rates on a 500k policy”. The agent is seeing what my options are … has anyone come across that scenario?
It seems like a reasonable request since he’s under your household. And if someone wants to sue him while he lives with you, they would logically go after the head of household or overall household wealth.
I had the same scenario play out with my wife’s insurance last year. Her car is insured with another company and my agent requires her minimum to be at $300,000 for her to be added it on my umbrella insurance. I explained that we’ll be downsizing to 1 car and selling that car this spring and have no desire to pay extra since it just sits in the home lot most of the time. We’re now going to put up for sale. This seems to be common procedure.
I would be very interested in you writing an article about the realities of raising kids in SF proper. What do you do for daycare? Even if one parent doesn’t work you’ll surely want some early childhood socialization/education. Can you get into a decent daycare in SF or is it virtually impossible? How pricey are the “good” daycare options?. What about school? How expensive are the “top” private schools in SF? How competitive is the admissions process? Is public school considered an option among your peer group? Are there any hybrid alternatives that people view as acceptable middle grounds?
What I’d like to clarify is whether the policy would cover each person in the household for $3 million for the same incident or is it only $3 million per person for separate incidents? Honestly the likelihood of such a lawsuit is rare like you pointed out so I’m not sure it’s much of a benefit if it’s for separate incidents. It would be much more valuable if you are covered for $3 million and your spouse another $3 million for the same incident, and $3 million for each of your 18 other imaginary household members.
Good question. My scenario is more like this:
* I swerve off road and badly injure someone. My car insurance and home insurance kick in for $500,000 liability. Then the umbrella policy kicks in for everything above that amount up to $3M.
* Brash teenage son gets in a fight with some older person. Older person is out of work for two years due to massive concussions. This person files suit for $3 million. My umbrella policy covers my son in case of a loss.
* A delivery person then slips on my front steps, breaks their entire body, and decides to sue for $3 million. My umbrella policy kicks in.
These are all separate incidents. If I then get in a fight with someone and bust them up and they file suit, and I’ve already lost all other suits, then my umbrella policy still kicks in for this one. But of course, with each incident, the premium will likely go up.
I just want to have a discussion with the community about their insurance coverage and asking their insurance companies some scenario questions. It’s good to know, as you don’t want to end up in a situation where the insurance companies says, “SO SORRY! You are not covered.”
Sam, I know you are not offering this article as a coverage opinion, but intentional acts (your son’s assault on the older guy) are not covered by insurance. In other words, you cannot take a bat and walk across the street and strike your neighbor and come home and call your insurance company and tell them the suit is coming.
Just offering up examples. One does not intentionally beat someone with a bat without reason. Just saying things happen, and who knows, hence the reason for an umbrella policy.
The point of this article is remind people to protect their assets, have a talk with insure co since they’re paying for coverage, and make sure the insurance is aligned to expectations. Spending a lifetime of work and saving only to see it get wiped away by some random act would be unfortunate.
I understand. I am an attorney who represents insurance companies. I love your site. I have umbrella coverage myself. But umbrella coverage has limitations. It covers negligence. It does not cover intentional conduct. While someone might not “beat a person with a bat without a reason” (presumably it is a good reason) you cannot hids behind your umbrella insurance thinking you are covered. You are not covered for that conduct. Your personal assets are exposed. Your personal assets are exposed (a better example) if you drink and drive. Your negligent driving in that instance might afford partial coverage but a punitive damage claim for your intoxication while driving would not be covered.
Good stuff. I guess you are not a delivery boy then! :)
Bottom line: be a good person. But get protected from the world around you.
Is your occupation to defend insurance companies from paying out claims to customers? If so, perhaps you can share the most common shams by customers and tips for how to get insurance companies to pay what they say they will pay!
The article doesn’t give an indication as to the rationale of how much umbrella policy coverage one should take out. It would seem to me that there must be some data which shows how much people typically get sued for, as a function of net worth. Integrate that with your lifestyle and risk tolerance, and you come up with some target coverage. I’ve never seen such data and analysis, but it would be a great supplement to this Financial Samurai blog post.
I imagine that the implied rationale in the “get as much umbrella coverage as your net worth” approach is that the most likely ‘extreme’ scenario is that you would be sued for everything that you have, and thus this policy would cover you. But, what’s to prevent someone for suing you for more than you’re worth? Nothing. But perhaps this just does not typically happen? Also, any data on how having an umbrella policy (of course, only were that to be known to the other party) affects the likelihood that you would get sued?
One other thing I’ve heard, that seems somewhat obvious, is that the larger the umbrella policy you own, the better the lawyers that the insurance company will use on your behalf, in the event that you get sued.
So, I’d love to see Financial Samurai publish a data-based calculator for recommending umbrella coverage… Enter net worth by major category, enter risk tolerance, enter some lifestyle data… And, voila, out pops the recommendation!
You are right. This article is more about highlighting the benefits of having a large family over being single.
Anybody trying to sue someone more than someone is worth has got to be pretty vindictive. To put it to an extreme, are you really going to sue a homeless man for $10 million when there’s no chance you’ll ever get that back?
Makes sense that my insurance co would lawyer up more to protect more at stake. I hope nobody messes with USAA! :)
Great idea on a data-based calculator. Let me see what I can do…
More often than not large personal injury cases are settled for policy limits. There is, more or less, an unspoken rule in the legal field to settle at policy limits if the defendant is seemingly adequately insured. (Net worth is a fair gauge)
Did your agent specifically state that your premium would be the same if you had one person (like you do) on your umbrella policy or if you have 20 like your scenario you laid out? I doubt highly that would be the case … but if it is, then I am a monkey’s uncle.
My umbrella policy I had to swear that I had 2 people in my house, and also had a rider that if others lived at my place I had to call and change the policy to update with the number of people living there or the policy was null and void. Maybe you have a better vendor or state laws are different, but that was not my experience.
USAA didn’t make me swear at all. And they could have said if you have 20 in the household, then my premiums would change despite covering each individual for separate incidents. Perhaps you should give USAA a call, and let us know!
Big-D’s scenario is definitely extreme and warrants making some calls to find better coverage and service. However, I’m sorry, Sam, but USAA is absolutely not the answer. They aren’t what they used to be, and there are better options available…
FYI: The only carrier I’m familiar with that rates based on household members is Hartford. If you have 20 people in your household, you’re premium is going to be higher than a single man.
I took out my first umbrella policy the year before my first child received their driver’s license. Once my child received their license, the policy really jumped (nearly double). It went up another hundred odd some when the second child got their license, and I suspect it would climb for each additional individual. However, for the amount of coverage I carry on the various cars and home owners, it’s still a bargain where I live and my current policy for $2M is under $750 a year with a teenager still on the policy and that happens to be with State Farm.