"How much liability insurance do I need for a given net worth, and when do I need to consider an umbrella?"
Great, great question! Congratulations for bringing up a topic that I discuss with every new and existing client—the umbrella policy. It is such an important policy yet very few people have ever heard of it. It absolutely amazes me how many insurance sales people do not bring up these policies. These policies offer incredible protection for a very reasonable price.
First, let’s talk about your liability protection question before we dive into the umbrella policy. As a refresher, liability protection in a home owners or auto policy is the portion of an insurance policy that protects you in the event that you are legally responsible for damages to property or injuries. Each policy has its own maximum coverage amounts so if you don’t have enough to cover damages and injuries, you could be at risk of being sued and end up with a judgement against you that you have to personally pay. We certainly want to protect against that from happening so the more coverage you have, the better. The best way to purchase more protection at a very reasonable price is through an umbrella policy.
The umbrella policy is essentially extra liability coverage. If you purchased a $1M umbrella policy, you would have an extra $1M of coverage. Therefore, if you are in an accident and deemed at fault and someone in the other car sustains injuries that are more than the maximum coverage amount in your auto policy, your $1M umbrella policy will contribute the rest (up to $1M extra of course). The question remains, how much liability insurance should you have?
In working with clients, I will usually recommend a $1M umbrella policy once a client establishes a net worth of $100k. For some of you $100k may seem quite low and perhaps may seem like over insuring. The price of these policies is the reason I am not too worried about over insuring. Anyone who can establish a net worth of $100k can adjust their budget to accommodate the low cost of an umbrella policy. If someone has demonstrated the dedication and the ability to build a net worth of $100k, they need to protect that regardless of how they made it to that point. Perhaps they make a large income and saved that in two years—the income is reason alone to have the umbrella policy because a lawsuit could result in garnishment of future wages. Perhaps they lived within their means and saved for 10+ years to get there—they do not want to lose 10+ years committed to their future for what could have been prevented with the umbrella policy.
As net worth increases, I recommend increasing the umbrella along with it to match net worth. For instance, once your net worth goes from $1M to $2M, I would recommend increasing the umbrella policy to $2M.
This is one of those hot topics for me. I want everyone who reads this to know that I do not sell insurance of any sort (or anything for that matter). I am passionate about the umbrella policy because if you ever need it, you will be happy you have it and potentially financially ruined if you don’t. For the low cost of these policies, do yourself a favor and purchase one. As always, I hope this is helpful and may even save you big time!