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I recently posted a request for comment about the appropriate amount of umbrella insurance one should have. I was hoping to learn of some formula or rule-of-thumb stating that “if your net worth is $X, you should carry $Y of umbrella coverage.” As far as I can tell, there is no such formula or rule.
Many thanks to those who responded.
Mark Eckman wrote that most insurance companies offer a maximum umbrella of $5 million.
Patrick Brennan’s insurance representative regarded $500,000 of liability coverage on his auto policy and a $1 million umbrella as sufficient for his needs.
John Yeigh indicated that the most common legal settlements are in the $1-2 million dollar range. He personally has $3 million of umbrella coverage.
Rob Jennings and David Lancaster both cover their net worth. Edmund Marsh has coverage a step above his net worth.
Adam Grossman, in his post Grab an Umbrella, dated May 2, 2021, doesn’t explicitly call for matching umbrella coverage to your net worth. Instead, he asks how large a legal judgement against you might be. He cites one study reporting that most settlements fall in the $1-5 million dollar range. He therefore recommends that your umbrella coverage falls in that range as well.
The website www.ramseysolutions.com (affiliated with radio personality Dave Ramsey) recommends carrying umbrella insurance if your net worth exceeds $500,000. Beyond that, your umbrella policy should cover your net worth according to the site.
Ultimately, the extent to which your lifestyle exposes you to potential lawsuits (e.g., you have a pool, you coach youth sports, etc.) will dictate what an appropriate level of umbrella coverage is for your needs.
My conclusion: If your net worth falls within the $1-5 million range cited by Adam, match your coverage to your net worth. Beyond that, talk to your financial advisor or insurance agent.
In most States, PUL policy premiums are minimal. As others have stated, most carriers will offer $1-$5M at the agency level, without fuss or muss.
When I was an agency owner with Nationwide Insurance, I always recommend covering your Net Worth, as a minimum. The cost differential between $1M and $2M was negliable. I also recommended not being penny wise and pound foolish, when determine your needs for liability coverage.
There are any number of variables to consider, but your agent will know the applicable laws and regulations in your state. Age, assets, types of assets, where held, how held, whether you have teen aged drivers, whether your property contains any attractive nuisances, and on and on.
You can rarely have too much coverage and I doubt you will ever regret any coverage amount you carry.
You make excellent points, Kevin. Thank you for posting.
I especially like your admonition to avoid being “penny-wise and pound foolish.”
It appears that one’s insurance agent may be a better source of guidance than one’s financial advisor, especially if the latter lacks insurance industry experience.
My wife and I just established a revocable trust to avoid probate when we die. Unbeknownst to us, our umbrella policy with our insurance company (Amica) does not cover the house in a trust. Cars, yes. Not the house. So, now we have to consider changing our house/car insurance. Beware.
Wife and I had $1MM for a long time. Last year we increased to $2MM, but I’ve considered that maybe that’s a little low.
I don’t gauge it based on net worth, but rather more closely to worth that is accessible to a judgment. Please know that it may vary by state, but most states protect retirement accounts and at least some amount of home equity from collection in case of a judgment. That leaves our theoretical exposure to be much less than our “net worth.”