Making money hand over fist in this bull market is nice. However, the more money you make, the more money you have to lose. Therefore, it's important to update your umbrella policy coverage to account for greater wealth.
Compounding wealth has a funny way of sneaking up on us. What may have taken you 10 years to accumulate your first million might only take three years to accumulate your second million.
If you regularly invest, then I suspect your net worth has grown to all-time highs since the pandemic began. Therefore, your current umbrella policy is likely no longer enough to fully protect your assets.
What Is An Umbrella Policy?
An umbrella policy, also known as personal liability insurance (PLU) kicks in after your auto insurance policy or homeowners insurance policy is fully exhausted. Your umbrella policy sits on top of your auto insurance and homeowners insurance policies.
For example, let's say you get into an automobile accident and cause bodily harm to a pedestrian. The pedestrian sees that you drive a new 7-Series BMW and decides to sue you for $500,000. If you drove a beater car, the pedestrian might have only sued you for $50,000 or nothing at all.
Your auto insurance policy has $300,000 liability coverage with a $1,000 deductible. You have a $1,000,000 umbrella policy with a $300,000 deductible.
If the pedestrian successfully wins the $500,000 lawsuit, your umbrella policy kicks in to cover the remaining $200,000 over your $300,000 auto insurance liability.
The reality is, accidents happen all the time, whether it is your fault or not. Even if the accident isn't your fault, you could be held liable for an unforeseen number of reasons.
Getting an umbrella policy helps protect the assets you've spent a lifetime building.
More Examples Why You Should Get An Umbrella Policy
If you're not yet convinced about getting an umbrella policy, here are some more reasons why you might want to get one. If you have an umbrella policy, these reasons should encourage you to update your umbrella policy coverage amount as well.
1) You have a teenager
An umbrella policy covers members of your household. And if you have multiple members of your household regularly going out into society, your risk of an accident goes up.
Driving teenagers puts your household at significantly higher risk of liability. Not only are they inexperienced drivers, they sometimes experiment with drugs, alcohol, and other things that may impair their judgement.
Personally, I'm scarred for life after a 15-year-old friend of mine died in a car accident in Kuala Lumpur, Malaysia.
He was supposedly evading the cops after taking his girlfriend out clubbing. He lost control of his car and hit a tree. His girlfriend, who was going out for the very first time, also died. A lawsuit ensued.
Your teenagers could bankrupt you with their careless actions. As a result, I would get an umbrella policy equal to your net worth.
2) You plan to retire early with young children.
When my car was in the shop for an afternoon, I felt as lost as forgetting to take my phone with me to the bathroom. It was then that I realized how much I depended on my one car every day.
In the late mornings, I often drive to play tennis. In the late afternoons, I often drive my son to a playground. Then there are weekly trips to the zoo, science museum, playdates, and doctor visits.
Every time I drive my car, I put our wealth at risk. As someone who plans to re-retire soon, I cannot afford to get sued due to some accident that wipes away a large portion of my wealth.
The wealth I have accumulated is used to generate precious passive income so I don't have to work. Losing wealth from a lawsuit means losing passive income. Losing passive income ultimately means losing the time I want to spend with my kids.
At most, I've got until my kids turn 18 before they will no longer want to hang out with me. In reality, they will probably stop wanting to hang out by age 14. Therefore, for me, having an umbrella policy is really about protecting the time I want to spend with my young children.
If you plan to retire early with young children in order to spend more time with them, getting an umbrella policy is a no-brainer.
3) You are a multiple tenant landlord.
When you have tenants, you invariably open yourself up to more risk. One way to mitigate risk is to put all your rental properties in an LLC. Another way to mitigate risk is to get an umbrella policy.
As a landlord, no matter how hard you screen your tenants or assess the safety of your rental property, something bad may happen.
No matter how careful you are in maintaining a property, something could go wrong. Maybe your property has faulty wiring, a leak that causes black mold, or undetected rot that causes the integrity of a protective fence to weaken.
Your tenants should have renters insurance and you should have homeowners insurance to account for most problems. But you just never know what could happen beyond the scope of your insurance policies.
4) You're a small business owner who sells a physical product.
The more you serve people, the higher the chances are that something bad might happen to you. Just ask doctors trying to help patients how much they have to pay in medical malpractice insurance.
Let's say you operate a chocolate store and one of your employees has a psychotic break. Your employee stabs a customer who was extremely rude and impatient. The customer could sue you for negligence. An umbrella policy would protect you.
Or maybe you run a restaurant that is already struggling to survive thanks to COVID. To boost revenue, you open up an outdoor dining area where cars used to park on the street. Then one unfortunate evening, a car barrels through the outdoor dining area causing injuries to your diners.
One litigious diner breaks his leg and can't walk properly for the next six months. He believes you didn't properly reinforce the outdoor dining area. As a result, he sues you for $1 million, which is about all you have. An umbrella policy should be there for you beyond your business insurance.
5) You're a personal finance enthusiast.
If you have been reading Financial Samurai since 2009, chances are extremely high you've grown your net worth way faster than the average American. Reading financial topics will naturally make you care more about your finances.
Maybe in 2016, you decided to invest in various heartland real estate opportunities after reading, Focus On Trends: Why I'm Investing In The Heartland Of America.
Or maybe in March 2020, you read, How To Predict A Stock Market Bottom Like Nostradamus, and decided to buy more stocks around that time.
If you did either of these things, at the very least, you need to protect your gains.
Some of you might decide to diversify into bonds or lower-risk assets for capital preservation. But for those of you who plan to continue interacting in day-to-day society, updating your umbrella policy coverage to reflect your wealth gains makes sense.
In a lawsuit, savings accounts usually are fair game. However, retirement accounts, such as a 401(k) and IRAs, are typically protected from a liability lawsuit.
Note that although 401(k) retirement plans are protected under the Employee Retirement Income Security Act of 1974, individually held IRAs get only a partial exemption in bankruptcy. So you would have to rely on state laws for protection.
6) You're a high profile individual
If you're a celebrity, politician, sports star, or any other type of high profile individual, getting an umbrella policy is important.
Risk is a numbers game. The more people who know you, the greater the chance that someone might sue you. Even if you didn't do anything, someone could still bring a lawsuit against you.
Practice stealth wealth if you want more peace of mind.
Example Where You Don't Need An Umbrella Policy
Of course, not everybody needs or wants an umbrella policy. We all have various levels of risk tolerance as well.
Let's say you drive a $38,000 Ford F150 and earn $65,000 a year. Screw the 1/10th rule for car buying! You're also married and have no children yet. Eventually, you plan to buy a house. But before you do, you want to pay off $9,000 in credit card debt and your $25,000 car loan.
At age 30, your net worth is about $70,000 versus $250,000 in my average net worth for the above average person post. There is no need to get an umbrella policy because your auto insurance liability coverage is $100,000.
Although your car loan prevents you from investing in the stock market or saving more for a down payment, at least it saves you from needing an umbrella policy.
You still feel invincible with an attitude that you can work forever! My hope is at the very least, you will get a 30-year term life insurance policy given you plan to have children eventually and buy a house with a mortgage.
A 30-year term at age 30 is the best age to get life insurance. It's like locking in a 30-year fixed-rate mortgage at an all-time low. The time period between age 30 to age 60 is usually also when you have the highest number of responsibilities.
Be Careful Getting Too Large Of An Umbrella Policy
In a lawsuit, how much liability insurance you have and your overall assets can be ascertained by a personal injury lawyer.
A creditor can require your appearance at court for an asset hearing, where the creditor can ask you questions under oath about your assets and demand you produce documentation regarding your wealth and ability to pay.
Failure to appear at an asset hearing generally results in a bench warrant being issued for your arrest. Failure to tell the truth under oath could have financial consequences as well.
Just be careful getting an umbrella policy far larger than your net worth.
If you have a net worth of $1 million but have an umbrella policy of $3 million, an injury lawyer may be more motivated to go after you. After all, it costs the same amount of time to sue someone for $1 million as it does for $3 million.
The irony is, if you had no umbrella policy and only an auto insurance liability coverage of $300,000, the lawyer may not want to pursue you. Or, he may only sue for the maximum of $300,000, even if you have millions of dollars in net worth. Injury lawyers go through a cost-benefit analysis before deciding to pursue personal assets.
Injury lawyers are generally looking for insurance funds, and sometimes turn down new cases, or withdraw from existing cases, as soon as they realize that there is no insurance.
Insurance companies also don't want you to have more umbrella policy coverage than you need. You pay the monthly or yearly premiums, but they pay the full amount.
The good thing to note is that the higher your umbrella policy, the more inclined your insurance company will be to fight for your rights!
Umbrella Underinsured Motorist Coverage (UIM)
A Financial Samurai reader, who is also an attorney added some great advice that I'm adding here. He recommends purchasing an Umbrella policy that also has umbrella underinsured motorist coverage (UIM). This gives you umbrella UIM protection above the regular UIM limit you have on your policy.
Normal umbrella coverage only covers the injuries of people you injure through your negligence. The more likely scenario is that you and your family are injured by someone else.
The average liability coverage driver’s have is only $50,000 and many drive without insurance. Assume your family of three is hit by a driver with only $50,000 in coverage, killing the main bread winner and seriously disabling the other two.
In a normal scenario, you would be limited to recovering the $50,000 and whatever UIM coverage you have on your regular policy, say $300,000. A total recovery of $350,000 would not even begin to cover the lifetime of lost earnings for the deceased and the daily in home nursing care for the disabled.
Umbrella UIM would kick in above the $350,000 and provide your family another million or more in coverage. As an attorney, the most common scenario he sees is that there is rarely enough insurance coverage to cover the losses in a serious accident.
Solutions If You Can't Get Umbrella Underinsured Motorist Coverage
If your insurance carrier doesn't provide UIM, the main way to protect your family in case of your injury or death from an uninsured/underinsured person is to increase your auto liability coverage. Increasing your auto liability should automatically increase your uninsured liability coverage.
For example, I have $300,000 per person, $500,000 per accident auto liability coverage. I can increase the coverage up to $1,000,000 per person and $1,000,000 per accident for $50 a year. If I do, the coverage also extends to uninsured liability coverage.
The other solution is to have an appropriate life insurance policy that covers your debts and family's living expenses. If you are the main or sole income earner with young children, life insurance is a must.
Check Policygenius for the best rates. My wife recently used Policygenius to double her life insurance coverage to match mine for less money. Having different amounts of life insurance coverage made no sense since we are equal partners.
The Cost Of An Umbrella Policy Is Inexpensive
After doing my latest net worth update, I called USAA, my umbrella policy provider. They said a $4 million umbrella policy costs $510 a year and a $5 million umbrella policy costs $620 a year. This policy is for a two-adult household.
Then I checked with Liberty Mutual and they had similar rates. In other words, the cost of an umbrella policy for a two-adult household for us is between $150 – $200 a year per $1 million. That's pretty good value for peace of mind.
The larger your household and the less products you have with the insurance company, the likely more expensive your umbrella policy. Therefore, if you want to save on your umbrella policy, your best bet is probably to go with one carrier for your auto insurance, homeowner's insurance, and umbrella policy for a multiple product discount.
Also know that with regular insurance carriers, there is often a $5 million umbrella policy limit. If you want to get an umbrella policy for more than $5 million, you'll have to contact speciality insurance providers like Chubb.
Here is a survey from ACE Private Risk Services that measured the cost of an umbrella policy.
The ACE report provides these typical annual costs:
- $383 for $1 million in coverage for a household with one home, two cars and two drivers
- $474 for $2 million in coverage for the same household
- $608 for $5 million in coverage for the same household
- $999 for $10 million in coverage for the same household
- $1,578 for $10 million in coverage if the household also has 2 more homes, 2 more cars, a boat under 26 feet, and a driver who is under 25
I hope by now you've come to the conclusion that getting an umbrella policy is a wise decision. If you haven't updated your umbrella policy coverage amount in a while, please do so. Call your current insurance carrier and see what they have to offer.
Ideally, your umbrella policy coverage keeps pace with your net worth plus a buffer. This is why updating it every time your net worth grows by $500,000 – $1,000,000 is a smart move.
While you're at it, you might as well update your life insurance coverage as well. Protecting your wealth, especially if you have children, is one of your main duties as a parent.
Readers, do you have an umbrella policy? When was the last time you updated your umbrella policy? Have you ever had to use your umbrella policy? How much does your umbrella policy cost? Please note your homeowners insurance policy likely needs to be increased as well.
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73 thoughts on “Your Umbrella Policy Needs To Be Updated Thanks To A Bull Market”
AAA is my primary insurer for auto, home and 2 properties. 1 property is through Farmers. Had to go with RLI because AAA requires all properties/auto be with them to cover umbrella. 3 drivers and 3 homes, costs below:
$1M – $347 a year
$2M – $624
$3M – $833
$5M – 1093
The quotes from USAA and Liberty seem pretty inexpensive but maybe there are other factors at play.
“Compounding wealth has a funny way of sneaking up on us. What may have taken you 10 years to accumulate your first million might only take three years to accumulate your second million.”
My experience exactly. And the next comes even quicker.
I hadn’t thought about umbrella policies since I studied them in school, some decades ago. Thanks very much for the reminder.
No problem. Then you’ve been able to save good money on umbrella policy premiums since!
The amount of surprising wealth created since the beginning of 2021 has been incredible. Might as well protect it.
Well, we live in a modest (for the area) home and drive older cars. We don’t throw enormous parties, or wear designer clothing and expensive jewelry, etc.
It was instinctive for us, things we do that are relatively expensive are not that obvious to casual observers (things like travel and vacations and interior renovations, helping the kids and grandkids, and not stinting on the little things such as good fresh food and wine and such), but I’ve seen your articles on making this sort of thing an important part of protecting yourself.
We like to think we have simple tastes and there is certainly no point in advertising, in any case.
I’m guessing this doesn’t fall under an umbrella policy, but I’m looking to buy worker’s comp insurance for my household employees. Like we hire a house cleaner, garderer, tree trimmer ect. If any of them get hurt on the job they are considered my employees and wouldn’t qualify for my homeowner’s liability coverage because they weren’t guests.. but instead by CA law…my employee. How do i go about getting some kind of affordable and broad worker’s comp coverage for random workers that come to my home to do odd jobs? (Let’s pretend I just picked someone up at Home Depot to do work on my house.. not what i do.. but let’s pretend… is there a way to insure yourself against them suing you if they injure themselves doing chores around your house?)
Do you know of any general liability insurance for hiring contractors? Let’s say i hire a contractor and they claim they have a license to do the work but I later find out they don’t? Can I buy some policy to cover for a lying contractor? Sometimes looking up their license online is inaccurate. I’ve hired licensed contractors who then send out unlicensed workers to do the work. Sometimes I’m on vacation and they come and trim trees while I’m gone. If they fell and sued me would i be liable? If they get hurt on my property can they technically sue me? What’s an umbrella policy i can buy to put my mind at ease for that?
Depending on the scope of your project you may want to purchase a builder’s risk insurance policy, which can potentially cover a large number of causalities, quality workmanship, and on-site liability. A few insurance companies are also able to add riders to existing homeowner insurance policies to cover construction, but this has to be negotiated and put in place before the project starts.
To guarantee payroll and similar amounts owing to your contractor’s subs, suppliers, or employees, you may be able to ask for a payment bond. This will increase your project cost by a percentage (charged by the bonding company). A guarantee of this caliber on a private project really only makes sense on large projects (5 mil plus). Quite frankly many residential contractors may not have a relationship with a bonding company to begin with. Instead you could ask for certified payroll reports via your contract
Of course circumstances and laws may be totally different where you are located so please do not rely on any information in this post. It is an informational brainstorm only and you should consult an attorney before moving forward.
I currently have a $5 million policy with USAA for a single person which is a bit higher than my net worth would need but the policy cost last March was $319. This post did prompt me to go look at my most recent statement since I’m changing states the first of the month. I need to call and check on the umbrella again since it’s under my old state, my other two policies (Auto and home) show up in “both” states.
Great post. Who do you use for umbrella policy?
Do you have a recommended broker or agent in los angeles?
Thanks so much
Most apartment rental polices exclude mold coverage. Some are now extruding asbestos and lead abatement. Adding umbrella does not expand coverage, it just expands the limit. So if something is excluded by your primary coverage, adding umbrella won’t help.
Did you have a mold issue and tried to use an umbrella? If so, please share! Thx
Luckily, here in Australia there is compulsory third party insurance when you pay the registration fees for your car each year. This covers injury etc to people. It costs about AUD 600 per year (USD 450) if I remember correctly.
We also buy insurance for our car which covers damage to property (as well as to our car, but it is hardly worth anything). Looks like the standard cover is up to AUD 20 million. That was AUD 700 almost. With the actual registration fee we’re at almost AUD 2,000…
We have home content insurance. The body corporate (condo association) covers the building insurance. I’m thinking we don’t need any more insurance?
My wife and I net worth is $4M with no debts. We have an umbrella insurance. My son is single 33 years old lived with us and shares all the expenses at home. He files his own tax returns. His car title is his only and included in the family auto insurance. If my son is involved in an accident and his fault, can the other party include my wife and my assets in the claim?
No, if he lived with you and lives on his own now. But if he still lives in your home he is part of your household and you guys are at risk. Double check please!
Thanks for the reminder. I have tried several times to obtain umbrella insurance in excess of 2M and have always struggled with it.
I have a 8 figure net worth and live in FL.
Our auto is State Farm and we live in a FL condo. There’s not many carriers insuring FL condos due to the hurricane risk, so I haven’t been able to reasonably combine auto and home. Both carriers would only quote up to 2M.
I talked to several agents to quote Chubb or other high net worth carriers but they declined citing that our home value does not meet their minimum guidelines (our home is valued ~1.8M).
We live in Florida and have $5 million in coverage with Geico.
Same here. Live in Florida, 5m from geico (though technically geico outsourced the actual policy to another insurer – was told by the agent that they do not write their own umbrella policies anymore)
What about irrevocable trust? Isn’t that better in protecting your assets?
Just be careful what you put in an irrevocable trust. Once in, it’s hard to adjust or get it out. That’s the point of it being irrevocable.
RLI is another insurer that sells “standalone” (i.e. you don’t need to have an auto/home policy with them) umbrella policies.
I’ve found it cheaper to buy my umbrella policy through my auto/home insurer versus buying a standalone policy.
Wow, the story about your 15-year old friend is interesting. I also saw a 16-year old high school tennis teammate die from losing control driving a car due to the lack of knowledge driving through snow.
It’s always one of those, “what if you just didn’t drive that single time, wouldn’t you be alive and well today?” stories that comes with car accidents. I have no idea when I would get into that one and last car accident that would end it all.
I never would have thought of increasing this with our net worth. Thanks for the info. I just called my insurance agent to discuss and got quotes on various levels to increase it. It’s really inexpensive for the coverage.
He was unsure if our 401k accounts were at risk in a lawsuit though…does anyone know?
Employer-sponsored 401(k) plans are safe from lawsuits. Only the Internal Revenue Service or a spouse can make claims on that money. Employer-sponsored accounts are protected by the Employee Retirement Income Security Act.
As for your IRA, it is more susceptible. Each state has different rules. As always, best to double check!
Attorney comment: 401(k)s are generally NOT at risk for bankruptcy. If the policy limits are not sufficient, however, the claimant can still request a personal contribution out of your assets, including 401k. So, your 401k is protected in bankruptcy but if push comes to shove, people will come up with the cash to stave off going down that route.
So.. with 5 SFH ( paid off ) worth 2.25 million and 800 thousand in the bank and savings I should have an umbrella of 3 million ?
Yes, $3-$4 million umbrella would be appropriate.
Thanks for the great article Sam – I have been your reader for many years – I live in Miami – family of 3 – my son is 11 – 5 rental and 2.2M Net – I just renew my Umbrella with Progresive for 2M $1134 – the good thing is they included the 5 rental in the policy – Note that you have to call them and request to add the rental properties because they only allow to have 2 rental per policy
Thanks for the reminder. I just upped my policy from $1 Mil to $2 Mil. I have Geico for everything and the cost went from $167 to $275 yr for the umbrella policy. Im single so thats probably why the cost is lower than others.
I’m an attorney and strongly recommend purchasing an Umbrella policy that also has umbrella underinsured motorist coverage (UIM). This gives you umbrella UIM protection above the regular UIM limit you have on your policy. Normal umbrella coverage as discussed in the article only covers the injuries of people you injure through your negligence.
The more likely scenario is that you and your family are injured by someone else. The average liability coverage that driver’s have is only $50,000 and many drive without insurance.
Assume your family of three is hit by a driver with only $50,000 in coverage, killing the main bread winner and seriously disabling the other two. In a normal scenario, you would be limited to recovering the $50,000 and whatever UIM coverage you have on your regular policy, say $300,000.
A total recovery of $350,000 would not even begin to cover the lifetime of lost earnings for the deceased and the daily in home nursing care for the disabled. Umbrella UIM would kick in above the $350,000 and provide your family another million or more in coverage.
As an attorney, the most common scenario I see is that there is rarely enough insurance coverage to cover the losses ina serious accident.
Such great advice! I’ve added it to the post.
Just spoke to my insurer, my auto insurance policy has uninsured motorist following injury is $300,000 / person, $500,000 per accident. They don’t have UIM unfortunately. Therefore, I’ve upped my uninsured motorist policy.
And the other main thing is to make sure your life insurance policy is high enough to cover all your debts and living expenses in case an uninsured motorist kills you or the main breadwinner.
Phew, this is complicated but very important stuff to go through! Thanks
Awesome. Thanks for incorporating this info. A lot of carriers do not offer the UIM coverage on their umbrella policies. A way to get around this is just to buy a separate Umbrella policy through another company that does. My regular auto insurance is with Travelers and my umbrella with UIM umbrella is with RLI. The Umbrella with UIM is around $450 per year for $1,000,000 in coverage.
Single 40m 5 properties and my policy is $1200 per year for 2 million in coverage.
Thanks for sharing. I’d shop around. $1,200 for a $2 million umbrella is double the cost I’ve seen after shopping around.
A judgement against you could levy part of your salary (even Social Security?) so you need to cover not only your current net worth but potentially your future earnings as well.
I only have it because of you. I read an article a few years back where you wrote about this and I thought it would be a good idea. I started with a fairly high coverage, but now it looks about right based on this article. So, thanks again.
Sounds good. To me, protection and peace of mind is worth way more than the annual premiums I pay. It’s not even close. Hope it’s the same for you.
Umbrella Policy = MANDATORY
Also, I’ve heard it isn’t just a matter of current assets we are trying to protect. Somebody could win a judgement against you that can be in excess of your assets and go after future earnings via wage garnishment ESPECIALLY if it looks like you are a high earner (which they would be able to figure out after digging into everything in your economic life as described above). I don’t have first hand experience of this, thank the lord baby Jesus, but I have heard it many times.
Also, and this is especially the case if you have separate insurance providers. Make sure your minimums for auto/home meet the standards for the umbrella policy. Alternatively, make sure you are not paying MORE for anything above the minimum on the auto/home. Though I only go through one provider (Allstate), I have thought about parsing it out to see about saving some moola. However, I also thought that I would have to be very diligent to make sure that my insurance policies don’t change and somehow not meet the minimum requirements for the umbrella policy. Figuring, if I have them all under the same Co, that could be an easier thing to make sure the puzzle pieces fit, and that if that one insurance Co somehow screws up and my policies don’t fit properly, hopefully they would somewhat do the right thing (naïve maybe??? Haha!)
Lastly, stealth wealth is for sure the way to go yet in this era, it is getting VERY hard to hide.
[Single Male, no kids, SoCal, 40ish, High W-2, $5.3MM net worth self made (rentals, stocks, other), mortgage debt only @ 0.50 LTV, $5MM umbrella, drive 10yr old truck]
“judgement against you that can be in excess of your assets and go after future earnings via wage garnishment ”
in that case a defendant would file bankruptcy which would stop wage garnishment & once complete would discharge any excess judgment.
unless the defendant was DUI…so don’t drive under the influence!
Sam – I’m not sure I fully understand the rationale for getting umbrella coverage equal to one’s net worth. To illustrate, assume you have $1M net worth and $1M umbrella policy. You cause a horrendous accident and liability is clear. What is it that would stop an aggressive lawyer from suing you for $2M? Nothing.
Having an umbrella policy equal to your net worth seems like it is there to ‘protect’ your assets, but I think that protection is illusory.
Clearly the more liability insurance one has, the less likely a lawyer might be to get a legal judgment above that. So, then isn’t the right guidance to purchase as much insurance as you can, subject to your risk level, risk tolerance, and what an insurance company is willing to sell to you?
Sure. Put yourself in the lawyer’s shoes. You have a limited amount of time and demand from clients. Would you want to spend time trying to squeeze water from a stone?
Most lawyers would rather take on cases they could actually win. It doesn’t matter if you sue for $50 billion. You won’t win that much unless the defendant is Jeff Bezos.
That said, getting an umbrella policy $1 million greater than your net worth is not a bad idea given how affordable more coverage is. Your net worth usually is always growing
Do you have an umbrella policy? If so, how does it compare to your net worth? Thanks
So, again, how about my example of $1M net worth + $1M umbrella policy. How does that umbrella protect you from a $2M lawsuit?
I had a $3M umbrella policy with Geico, I recall the most they would allow without more documentation. Unfortunately, my wife got a speeding ticket so Geico informed us that our policy was not being renewed, at least until some 5 years had passed. Not pleased with Geico for that, especially since I have Auto and Home through them. Net worth is considerably more than that, so feeling somewhat exposed, but haven’t been able to find find a suitable insurer yet. Any recommendations?
I’m not sure why someone will sue you for a $2 million when your net worth is only $1 million. I guess they could, but it is highly unlikely and would be a waste of their time.
Can you share an example of why someone would sue you for double you are worth? Thanks
Hmmm… I guess I don’t see why an injured party wouldn’t sue you for as much they believe they have a credible claim for, irrespective of your net worth. In this example, they believe they have been injured to the tune of $2M, so that is how much they sue you for… Because you have a $1M umbrella policy, it pays out $1M of that. The remaining $1M you are still liable for and needs to come out of your savings.
Sounds good. Good for a $2 million umbrella if that makes you feel better!
An umbrella policy, in general, is something I would have never thought of. With our net worth growing faster and faster, it is now something I’ll be looking into. Thanks for your information and insight. As always, it is amazingly helpful.
Thanks for the reminder and advice. I haven’t thought about an umbrella policy in a long time. Good point on those with teenagers. You just never know. I got into a car accident as a teenager and it was my fault. I was a careful driver but lack of experience caused me to panic and I mistimed things. Things happen crazy fast on the highway.
Thankfully the other driver didn’t sue my parents cuz they sure couldn’t have afforded to go through that.
Wow, this was an eye opening article. I do not have umbrella coverage, but after reading this, I think I need to get a policy. Currently, I am at about 40% of my number to FIRE on, and I would like to protect myself from losing everything I have worked so hard to accumulate over the years.
I am still a bit unclear about what all an umbrella coverage protects against beyond car accidents and home owners incidents. Is it blanket coverage that protects you for any reason somebody could sue you, or only in a limited context?
Good article Sam. Possibly updating my policy is on the list, but have investment properties in LLCs and those and the rest of my assets in a trust. My understanding from my former estate attorney said I was covered; need to re-validate but wonder if you have any info/opinion? I suppose belt and suspenders couldn’t hurt but my attorney did mention your point about an umbrella policy being discoverable in the event of a lawsuit.
As for your comment about the kids, you’re right and mine (especially my daughter) did a 180 on her daddy/superhero at 13 (she’s 15 now and not back yet ). The days go slowly but the years go quickly. Enjoy every minute!
If you have a revocable living trust
, it is revocable, which means that a personal injury lawyer could go after your assets in the trust if there is a lawsuit.
But if your trust is irrevocable, I think it may be better protected, but obviously has less flexibility.
What kind of trust do you have? Please double check with your estate planning attorney.
Will enjoy the precious time with my kids. Thanks!
Thanks so much for the reply – it’s revocable. Sounds like it’s a good thing I’m changing attorneys. Really appreciate it!
I am an attorney (tax controversy). Without providing you actual legal advice (please speak with your attorney), I will say this as a general statement — a revocable trust is worthless for protecting assets, its more of a probate and estate issue. And I say this as someone who also has a revocable trust. Just think of it this way: (1) where do you report your trust income? Its on your personal tax return and (2) how easy is it for you to move assets in and out of a revocable trust? the answer, easily. As a result, any halfway competent personal injury attorney would be able to get at those assets. While there may be a tad more work involved (I have no idea, I dont do PI work), those assets are still very much at risk.
An irrevocable trust on the other hand is good for asset protection. However, the downside is that once the assets are put in the trust, they become trust assets.
Now, there are ways to “decant” (yes, that is what it is called) an irrevocable trust to get the assets out, that is quite a pain (which is why the trust was irrevocable to start with). I am sure a good PI attorney could get at some of these assets (especially if there is any co-mingling or non-trust use of the assets) but it would be harder.
Lastly, the point about PI attorneys is largely correct in that they will almost always sue for “policy limits.” Now, I do not know how much that actually matters because they rarely receive that amount. Since most umbrellas seem start at $1M (at least that’s what I saw when I looked many years ago), I would suspect most people are covered simply because most injuries are not $1M+ injuries. That said, you may want an amount more that this in the event you/your kid kills or seriously maims someone, someone ODs on your property, etc. In this case you may be glad you are “over-insured” because the actuary numbers will control the victim’s “value” as well as potential medical costs. As a result, an attorney/victim may be more than willing to sue for more than the policy limits (ie a judgment of $5M but you only have a $1M policy). Keep in mind that is not to say this money is collectible, but having a judgment over your head is likely worse than the risk of being over-insured…if that makes sense.
All very helpful Michael – thank you! One other question..I own several multi family properties that are each in their own LLC. Assuming they remain in good standing/I don’t ‘pierce the corporate veil’ and have reasonable liability insurance for each, in your opinion (understanding it’s not legal advice) am I adequately protected or is an umbrella policy for each entity a worthwhile consideration as well? Thank you again!
Wait, is that how umbrellas work? I always thought they covered liability in excess of existing liability coverage. For example, if I had $500k in liability on a house and a $1M umbrella and then was sued for $1.8M, my normal liability would pay $500k and the umbrella would pay $1M and I’d still owe $300k out of pocket.
This article makes it seem like the $1M umbrella protects $1M in assets, such that even if I faced a $10M judgement, if my assets are only $1M and I have a $1M umbrella, all of my assets aren’t touched. Does the insurance pay the entire $10M judgement then?
This seems strange to me.
Your first example should be correct. The umbrella will only cover up to the coverage amount you pay for.
The personal injury lawyer could try and go after your personal assets beyond the umbrella, which is why having an umbrella policy equal to your net worth with a buffer makes sense.
But a personal injury lawyer has to do a cost-benefit analysis as to whether going after more than your umbrella coverage makes sense.
Do you mind pointing out where it is unclear in my first example of how it umbrella policy works? It would help me make example more clear to avoid any confusion.
And I also encourage everyone to ask yeah brother policy insurance agent clarity with examples.
I will disagree about the comment to limit the umbrella amount. While I agree, that $3M is excessive for a $1M in worth, it is not for a person with $2M. That way, you don’t always have to adjust for gyrations in valuations. The extra cost is minimal.
Another thing I have learned is have the umbrella with the same company that insures your autos. Vehicles are generally far riskier than homes. That said, getting all three is the best way to go.
Dealing with GEICO has its quirks. They dropped me because they would not insure us since our son who is living with us for now is a nonviolent felon. Since keeping him close to ensure rehab goes as needed is a priority, GEICO left.
I have spoken with an independent agent and before the year is out, I am moving all insurance business to one company which is the best way to go. I had not done that because I was fine with GEICO and the current home insurer does only homes (they stood by me when I had an issue so I am sorry to see them go).
Great reminder on a topic that too many American families do not pay attention to. In addition to my wife, I have a 17 year old and 15 year old driver in the house. I also have an in-ground trampoline in the backyard, a CrossFit gym in the garage, and a basketball hoop in the driveway that the kids and their friends use. The point…our homes, our vehicles, and our teenagers put us at risk, and the umbrella policy is a wonderfully inexpensive tool to gain some peace of mind. My kids approaching driving age was the trigger for me to obtain an umbrella policy, but I think I was foolish not to have that coverage earlier. Thanks for laying out this wisdom for your readers.
I have 15 tenants in various properties I own, 3 young kids, and 2 cars. A $1m policy in LA is $1300 a year. But still worth it. Might be adding 12 new tenants and feel like I should beef it up some more.
Might be good. Depends on your net worth as the umbrella policy amount should follow that amount.
$1,300 a year for $1 million sounds high. I’d shop around. I literally called USAA yesterday and they quoted me $620 for a $5 million umbrella.
Might be differences between commercial vs personal umbrella, although I’m not sure which is generally cheaper. I just bought several investment properties and State Farm said if I own >4 properties personal umbrella cannot cover it and would have to go to commercial. But even then I was quoted $250 for $1M and $1080 for $5M so Brent’s quote does seem high. Will check out USAA too thanks for the tip.
The thing is, I have been with USAA for 20 years and have multiple insurance products with them. So there is probably some discounting for multiple products.
Best is to get your umbrella with where you get your auto and homeowner’s insurance IMO.
Yes, I have Geico for all and have been with them for 16+ years. I actually talked to them today, and across all of the services, i’m getting around $1300 in discounts. So definitely your 20 years USAA is giving you a nice discount.
USAA sounds like a bargain. $2MM w/ Anderson & Murison is $610/year. I wonder what the Net Worth tipping point is to where it starts to make sense to do individual LLCs for each property. Feels like $5MM would be where it starts to make sense. My colleague has 27 doors in Long Beach, CA and has the separate LLCs for each structure (4-8 units each). $800/year per LLC in CA starts to add up, but it may be cheap for the piece of mind. I like the idea of doing both.
What of you are single, don’t own a house but are building your net worth without owning SFH rentals, should you have an umbrella policy?
I’m always going to have an umbrella to cover my net worth, or at least a good portion of it. Maybe when my kids are financially independent I’ll stop.
It’s really up to you and what you’re comfortable with. Accidents don’t discriminate.
Was asking for my daughters, will look into it. They can increase with when they buy homes
Excellent article and reminder!
Great article and the best insurance I have. We have 4 driver with 2 drivers under 21 and pay under $700 a year for both my wife and I. The piece of mind is worth it for me. The other advantage to the umbrella policy that my lawyer friend reminded me is the insurance company will fight like crazy to keep the settlement amounts low because their liability starts at dollar 1.
Also depending on the state you live in $1 million maybe enough even with a sizable asset base because of tort reform. I am betting that California doesn’t have that, but down here in the south the number of lawsuits that exceed a million can be counted on one hand.
Still a umbrella insurance policy that protects you and your assets from something tragic is worth every penny!
“The insurance company will fight like crazy to keep the settlement amounts low because their liability starts at dollar 1.” Yes indeed! The higher your umbrella policy coverage, the more the insurance company will fight for you. Got to love that alignment.
Will look into tort reform. Thanks.
Related: 12 Non-Recourse States Where The Bank Can’t Come After Your Assets If You Walk Away From Your Mortgage
We have a 1 million dollar umbrella policy. We need to update it – thank you for pointing this out! With 3 cars and 3 drivers, 1 a 19 year old male, the cost is $650 a year with geico. Still, the coverage is worth it. We are going down to 2 cars at the end of the summer – that will be a good time to bump up coverage. Thanks for a timely post!
Great! And no problem. It totally hit me the other day that I hadn’t updated our umbrella policy in two years. Yet, the markets and real estate have been rocking since.
I have a $5M with Geico for $860’s, you should definitely check with them again and get that rate confirmed. $4M more for $200 seems like an easy deal to me. I do have a bundle package though… My rate is actually higher too because there was a small fender bender a year ago or so. It stays on the record for 3 years and then falls off and my rate will go down further.
With my previous employer, I had an umbrella policy with Chubb. I think it was $2 million. But I never understood the parts about excess $1 million Uninsured/Underinsured Motorist Protection Each Occurrence meant. The people who answered E-mails left and then I left that employer. My new employer doesn’t offer it, so I no longer have pursued getting another umbrella policy. When my oldest daughter starts driving, I may consider.
Based on the cost of an umbrella policy, the fact that you have a daughter, and the likelihood your net worth has grown over the years, I’d still inquire. Have the agent explain your questions.