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Many HumbleDollar readers have saved and invested regularly over their working years and were able to retire comfortably. Unfortunately, a lawsuit could threaten that financial security.
One possible scenario: If, heaven forbid, you are involved in a traffic accident resulting in severe bodily injury or loss of life, a legal judgement against you could destroy your nest egg.
The liability coverage on a home or auto policy may not offer enough protection. For this reason, we are encouraged to purchase an additional umbrella policy.
Umbrella policies are usually sold in increments of one million dollars of coverage. Each additional increment raises the premium. But how much coverage do you really need?
The only recommendation I’ve run across is to match umbrella coverage to your net worth. But that is unsatisfying. If, for example, your net worth is $50 million, I can’t imagine you need $50 million of coverage.
For those HD readers who have an umbrella policy, how much coverage do you have, and how did you arrive at that figure? Have you ever heard of a rule of thumb for determining what a proper level of coverage might be?
Extremely large liability umbrella policies can be purchased from high net worth coverage insurance companies such as AIG. Was an article a few years ago about a pro athlete who bought a $25 million umbrella policy.
A case posted by a Boglehead (BH) a bunch of years ago. The BH was in a line of cars stopped at a stoplight, perhaps 3-4 cars back. An auto hit the last car in the back of the line at a high rate of speed pushing everyone forward far enough that the lead auto was pushed into the intersection where a crossing auto T-boned him. A young passenger in the T-boned car was rendered tetraplegic. The lawyers were licking their chops and sued everyone present within 100 miles (well…) The BH had an umbrella policy for $10 million (I think). When it was all settled and done that $10 million went toward the eventual very, very large settlement. And the BH wasn’t actually “at fault”; he was simply “there”.
Umbrellas are good. Be sure to have one. The downpour can be extremely heavy.
A client was at fault in the death of a motorcyclist. He did not have an umbrella policy. He had to take a $100,000 distribution from his IRA.
We have a 1 million dollar policy, costs us $184 per year; pretty cheap. I was not aware of independent insurers offering umbrella coverage. I will check those out.
Previous responses have pretty well covered the questions in this post. I wanted to make a couple of comments about Umbrella insurance. I think it is well understood that Umbrella policies provide higher coverage limits of liability above their underlying auto and HO policies. They also provide some coverage for liability in areas where you do not have underlying coverage. For example, if you go to the lake and rent a boat to go water skiing, your Umbrella will provide primary coverage. Because of this feature, these policies typically exclude coverage for renting airplanes or other very hazardous activities.
As far as the cost of Umbrella insurance goes, prices have been increasing partly because inflation has reduced the value of the underlying policy limits. In 1972 you could buy an Umbrella with underlying aut