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The Importance of Umbrella Insurance

Much has been written in the finance world about life insurance, including on this very blog. A less talked about but equally important insurance is Umbrella Insurance.

A Lawsuit waiting to Happen

Imagine for a moment, your driving down the highway and someone cuts you off. You are unable to stop and hit that person’s car at 5 mph. The person you hit sees your expensive car and makes a decision that they can sue you to get ahead. Suddenly they have an issue with their kneck or back and are sueing you. In an instant the nest egg you spent 10 years building is in danger. It could even be worse, they could garnish your future wages if you lose badly. Even if you win you are probably looking at significant lawyer costs. This sounds far fetched, but it happens every day. In fact it happened to me, though the person ultimately lost their suit and it was covered by insurance. That being said sometimes the cause is even more trivial then a 5 mile per hour fender bender.

Waiver’s, Liable, Plagerism, Kids, and the Millions of Other Things For Which You Can Be Sued

People are sued for everything in todays day and age. Anyone who writes for a living is at risk of being sued for plagiarism, liable (stating something about someone that may not be true), or copy write infringement. Sometimes something like liable or slander can be taken to extremes, there have been cases where people have successfully been sued for a bad review of a product. Do you see a blog that posts a lot of copy written pictures? Sooner or later they could be a big lawsuit target.

How about when you use a facility and sign a waiver for risks to you? Have you ever realized that the waiver protects the owner but not you.  If you accidentally harm someone else during an activity it is on you. So for example if your at a trampoline park jumping around with your kid and you accidentally collide with someone else then you have no protection from the waiver. Then again neither necessarily does the park as it is pretty well known that there is always a way around a waiver. For those with Kids in the house, did you realize you could be sued for something your kids do? Say they shot a window with a slingshot or accidentally hit someone while learning to drive, you retire potentially liable.

Even if you actively do nothing, if someone slips on your iced up walk during winter you end potentially a lawsuit target. Yes that’s right, even passively you can be sued.

What is Umbrella Insurance?

The above list was not meant to scare you. However it was meant to share with you how likely it really is to be sued and the severity of the potential impacts. So what can you do about it? Simple, purchase extra insurance to protect yourself from lawsuits. Umbrella Insurance is just such an insurance.

Low Liability Protections on Standard Policies

When you purchase car, auto, and home insurance they typically cover you for liability related to those activities up to a limit. Those limits are usually relatively low like 300K. The problem is those limits are easily exhausted just by lawyer fees in larger trials. So you need more, at least enough to pay for a decent legal team in the case of a large trial. Umbrella insurance, when purchased properly takes your liability beyond these standard coverages up to the stated amount. It also will cover liability for other areas of your life beyond home, auto and car. For example the aforementioned Liable and Slander.

How Much Umbrella Insurance should I have?

So how much Umbrella Insurance should you buy? If you have a high net worth, I recommend you insure yourself for your net worth. If you have a low net worth but a decent pay, insure yourself for at least 10x your pay to protect you from having your wages garnished. Typically experts recommend a minimum of 1 million of such insurance. According to ACE Private Risk Services 13% of injury lawsuits award more then 1 million, so you’ve covered 87% of the possibility with the insurance. Since this insurance primarily kicks in for catestrophic lawsuits only, the cost is usually much cheaper then auto or home where your paying for the possibility of a 10k payout. You can buy this coverage for somewhere between 150-300 dollars a year. Each addition million you buy will be cheaper. However I would recommend not over insuring, potentially limiting the number to below 2 million except in extreme wealth circumstances. Extremely large umbrella insurance may make you a target in the same way as the expensive car. If a lawyer sees you have 3 million in liability insurance he might be more tempted to go after it then if you only have 1 million. That being said unless you are broke, destitute, and have a job at McDonalds flipping burgers I would recommend this insurance as a must.

Some Things to Consider when Purchasing Umbrella Insurance

The way Umbrella Insurance works it kicks in above the limits of your existing coverages. As such pay very close attention to what that defined point is and where the upper points of your other coverages lie. What you don’t want to have happen is your car insurance cover up to $300K and your Umbrella Insurance cover from $500K-$1Million. You will essentially be on the hook for that $200K gap should anything ever happen, which would not be good. I typically recommend jumping all your regular policies to $500K in coverage since 500-1M seems to be the start of standard Umbrella Insurance coverage. If you want to do this cheaply consider upping your deductible on your existing policies, which will lower their cost. The reality is you should not use insurance unless there is a significant cost to a repair or fix. Small items can raise your rates and that raise will typically exceed the cost of the item. Therefore since insurance is for more expensive situations raising your deductible up to a still affordable rate will cover your catestrophic losses but allow you to keep your insurance costs relatively stable.

Do you have Umbrella Insurance? If so how much and why?

17 Comments

  1. Jim @ Route To Retire
    Jim @ Route To Retire April 28, 2017

    I purchased an umbrella policy a few years ago, particularly because of the rental property I had. I have the property in an LLC to help give some protection from my personal property, but the umbrella policy is another layer of protection. I had done a $1 million dollar policy at the time.

    Since I picked up the duplex a year ago and plan to pick up another one this year, I decided to increase the protection to $2 million. It may sound like it would be a lot of money, but it actually only runs me $250/year, which is nothing for the peace of mind it provides.

    — Jim

    • fulltimefinance@fulltimefinance.com
      [email protected] April 28, 2017

      I currently have less risk as I’m not running a rental property. Even so I have a 1 million dollar plan.

  2. I don’t have an insurance policy yet, but probably will in the near future. Now that I’m debt free, have a decent salary, and am in a better equity position in my house, protecting my assets is as important as growing them.

    Thanks for sharing FTF – it was a timely reminder.

    • fulltimefinance@fulltimefinance.com
      [email protected] April 28, 2017

      I wouldn’t wait too long, they can disgorge future earnings in a judgement afterall.

  3. Torch Red
    Torch Red April 28, 2017

    You got into a 5 mph fender bender in your C6? Did the damage buff out?

    • fulltimefinance@fulltimefinance.com
      [email protected] April 28, 2017

      Different car before the Vette. It actually happened to me about a year out of college while I was still paying off my debts: http://fulltimefinance.com/pay-off-63k-student-loan-debt/. Interestingly enough the lady took a full year to start her lawsuit. That was ultimately why I won, she waited too long to file. At the time I had nothing except debts and future earnings potential to my name.

  4. Dan
    Dan April 28, 2017

    Sometimes you are pressured to consolidate your insurance providers to get an umbrella policy. In other words, if you have car insurance with one company & homeowners insurance with another company, it will be difficult to get an umbrella policy form a third company or one of the two companies. They make you jump through hoops and give pricing incentives to consolidate auto, homeowners & umbrella policies. If you have it all with one company, they frequently require you to max out the auto & homeowner coverage limits before issuing an umbrella policy which is also called personal liability insurance).

    Can you cite the source of this statement? “13% of injury lawsuits award more then 1 million, so you’ve covered 87% of the possibility with the insurance.”

    I have a $3 Million policy. My feeling regarding the coverage amount is that lawyers will sue you for amounts much less than $3 million. However, by getting a larger policy, my insurance company has that much more incentive to dispute the claim or lawsuit. My insurance company has to pay out $3 Million (less deductibles) before I am affected; that’s large enough that the insurance company will not just settle the case to be done with it.. My concern may be unnecessary since my research indicates insurance companies fight every claim in ways subtle & obvious. I sized the policy to my approximate net worth rounded up to the nearest million. When you think about it, that’s not really a valid method to size your policy. Just because you have $2 million in net worth, it doesn’t mean you will be sued for $2 million. The size of the claim is by no means capped by your net worth or the size of you policy. I’m considering upping my policy which is why I’m curious about 13% being awarded $1 M. I’m wondering if the source data allows one to conduct a risk curve. Let’s say you want to be covered for 95% of the scenarios. Does that translate to a $3 M policy to $4 M or what? A lawsuit is an unusual event. Most injuries are settled within existing coverage limits without going to trial.

  5. Mrs. Need2save
    Mrs. Need2save April 28, 2017

    Literally just asked for an umbrella policy quote today. It was on our todo list this year. I will feel good when we have it in place. You never know.

        • Mrs. Need2Save
          Mrs. Need2Save May 2, 2017

          We were offered $1M for $370/year and $2M for $555/year. I thought it may be helpful to others to report back. They did ask a lot of questions to gauge their potential extra risk like whether we had any pleasure/sport vehicles like 4-wheelers, ski-doos, airplanes, or boats (which we have none of). They also asked if we were board members of any organizations such as the HOA or any volunteer/charity organizations.

          • fulltimefinance@fulltimefinance.com
            [email protected] May 2, 2017

            Thanks for the follow up. I did hear children also tend to jack up rates. Did you shop around for competitive offers?

  6. Troy @ Market History
    Troy @ Market History April 29, 2017

    I’ve heard that some bloggers were sued just for speaking out negatively about a company’s products. I just find that to be ridiculous and a waste of everyone’s time. Whatever happened to freedom of speech?

    • fulltimefinance@fulltimefinance.com
      [email protected] April 29, 2017

      I’ve heard worse then bloggers. I’ve heard of that on review sites like Yelp! It makes it hard to trust reviews if certain companies sue negative ones.

  7. Grant
    Grant April 30, 2017

    I hate that we even have to worry about stuff like this. Any rough idea on cost for 1-2 million in coverage?

    I guess this is another good reason for Stealth Wealth. If I hit you in my 8 year old Honda your neck pain would probably be dramatically less then if you were hit by a Bentley Continental.

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