Once you annihilate your debt and start to accumulate assets, you will become a larger and larger legal target. The more you have, the more you could lose if you are found to be at fault for someone’s bodily injury or property damage. You need to protect your hard work and lifetime savings. The way to do this is with umbrella insurance.
It’s a Dangerous World
If you think there is no possibility you could be named in a lawsuit, you are probably wrong. Your dog could bite someone and it could land them in the ICU with sepsis. You could drive into a fog band and rear-end a series of cars at 60 mph. A tree on your property could fall on someone else’s house causing a total loss. A neighbor’s child could fall off your balcony. Someone could drown in your pool. All of these are unlikely but possible, and you need to protect yourself.
What is Umbrella Insurance?
Umbrella Insurance is extra liability insurance that supplements your auto, homeowner’s/renter’s, boat, and professional liability insurance. It kicks in when the liability limit on your other policies is exhausted.
For example, suppose you are found liable in a car accident, resulting in someone’s injury and there is a $1 million judgment against you. If you have $500,000 liability coverage through your auto insurance policy AND a $1 million umbrella policy, you will have $1.5 million worth of liability coverage, and you will be adequately covered.
In most cases, you will need to purchase your auto, homeowner’s, and umbrella policies through the same insurer. The reason for this is that insurers who offer umbrella insurance do not trust other companies to fight hard on their behalf.
When you add on an umbrella policy, your insurer may also require you to increase the limits on your auto and homeowner’s policies. Standard limits are typically $300,000 for homeowner’s liability and $300,000 per person/$500,000 per accident for auto liability.
What does Umbrella Insurance Pay For?
Umbrella insurance not only covers bodily injury and property damage that you cause. It also pays for your legal defense whether or not you are ultimately found at fault.
Finally, umbrella insurance pays for areas where your auto, homeowner’s, and professional liability insurance does NOT cover, such as cases of libel, slander, or malicious prosecution. It also provides additional liability protection if you own multiple rental properties. Ultimately, you can’t just get by with high limits on your primary policies.
How Much Umbrella Insurance do I need?
If you have no assets (negative net worth) and a low income with no expectation of a higher income in the future, you may not even need umbrella insurance, because you won’t be a target in a lawsuit.
However, if you have a significant net worth (say, multiple six figures) and/or a high income, then you most likely need umbrella insurance. I am not an attorney, but I understand that a portion of your wages may be garnished if a legal judgment against you surpasses your assets and the liability limits of your insurance policies.
We live in a very litigious society, and according to data from Current Award Trends in Personal Injury, 18% of all personal injury awards surpassed $1 million.
This is not the time to skimp on your liability limits. You need to insure ABOVE your net worth. If you have a net worth < $1 million, then I would recommend umbrella coverage of $1-2 million. If your net worth is higher, I would obviously recommend higher limits. Some have recommended net worth + $1 million as a reasonable rule of thumb.
Note that some of your retirement accounts, such as 401k accounts and HSAs, may be protected from creditors, but to be on the safe side, I would use your entire net worth when determining the amount of umbrella insurance to purchase.
How Much Does Umbrella Insurance Cost?
The cost of umbrella insurance varies depending upon your risk factors. Things that increase your risk include pools, trampolines, drivers under 25, tree houses, ATVs, large house parties, and owning multiple rental properties.
However, umbrella insurance is generally quite cheap. $1 million in coverage runs about $200 per year, and $2 million in coverage runs around $350 per year.
Remember
The world is a dangerous place and you’re not immune from causing someone else harm or simply being on the wrong end of an aggressive prosecution attorney. You need umbrella insurance to protect your assets, your future earning potential, and your freedom.
This is such an important coverage – especially for doctors. People know that doctors make a lot of money so they can be a target for litigation. I realized last year that I had let my umbrella policy lapse for almost two years. That was scary but fortunately we lucked out. I got a new policy ($5M) for only a few hundred dollars a year.
Hi WealthyDoc. Glad you re-instituted your policy. I agree with the importance of Umbrella Insurance. It’s relatively cheap, and you’ll probably never use it, but you’ll be glad you have it if you ever do.
I found it interesting that there is some disagreement about this topic, especially with regard to the amount of umbrella insurance to have. According to an insurance defense attorney over at Bogleheads, (https://www.bogleheads.org/forum/viewtopic.php?t=156411):
“I never, ever, saw a plaintiff’s attorney try to chase personal assets. Ever. Not once, in over 30 years. If you have a million in umbrella, they’ll ask for a million in the policy-limits demand. If you have five million, guess what happens?
…My experience with plaintiff’s attorneys is that they’re in for the quick score, not to try the case to verdict (and judgment), and then attempt to transform the matter into a collection case.
The reason premiums for excess coverage are so low (relatively speaking) is that the excess layers put demands on the initial and mid-term layers of coverage to settle, on penalty of blowing their limits. The times the uppermost levels of coverage actually pay out? You guessed it. Almost never.”