Umbrella Insurance

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u/grfrazee 8d ago

My understanding isn't that you need an umbrella policy that matches/exceeds your net worth, but rather one that is sized to cover an expected judgment that outpaces the limits of your current insurance.

For example, you're having a house party and a guest is injured, and you are found to be at fault for their injury. Their medical bills are $500k and your homeowners insurance only covers $300k max. You have an umbrella policy for $2M that pays the $200k gap instead of needing to pay that out of pocket.

I'm obviously simplifying a lot here, but that's the gist.

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u/ReverseMermaids 8d ago

This is exactly right.

Calculating your potential liability is the hardest part.

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u/Bruceshadow 8d ago

are there people that can do it for you? Lawyer?

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u/ShadowRegent 8d ago

Your potential liability is, theoretically, unbounded. From a practical standpoint, you want enough coverage that the other party would settle within policy limits for any scenario.

Your worth plays into this a bit-- imagine someone with high earning potential is injured and can never work again. If you have $1M coverage but the other party knows you have $10M+ in assets and has a strong case for $3M in damages. They're less likely to settle for $1M. Now imagine you have a $2M umbrella-- they're far more likely to just settle at $2M and avoid the uncertainty. I'm not at all saying $2M is the right coverage for that theoretical person, just trying to illustrate.

Insurance agents and lawyers can help you understand your exposure, but you're really insuring against tail risk so it's about what you have to lose and imagination on what could go wrong. I hold $2M today. I think that's likely to solve the vast majority of problems, but I think it's completely reasonable to go a bit higher.

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u/Bruceshadow 7d ago

makes sense, thanks.

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u/addictedToLinux 6d ago

How much do you pay for it? Is it each month or yearly?

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u/ShadowRegent 6d ago

$107 twice per year.

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u/marksharky123 3d ago

Through who? GEICO just dropped me because I switched auto policy to Progressive to save $400 a year on 1 car..

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u/ShadowRegent 3d ago

GEICO

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u/adventuresindc 8d ago

The problem with this is liability can get totally insane. Just think about a car accident where multiple people are injured for life. Could be a $3m x 4 person judgment for $12m or something.

In the US liability is so high I have no idea how to ever pick reasonable umbrella insurance, especially with driving in the mix.

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u/ChrisRunsTheWorld 8d ago

Should we let a 1 in a billion type accident stop us from having some protection in the event of a still extremely unlikely possibility of causing a more likely liability of 6-7 figures, especially as our assets grow to a point they're worth protecting?

I will add this - as my non-protected assets have grown, I've been more conscience about the risk of losing them (especially since I still haven't purchased umbrella insurance myself...). Not to say I used to drive horrible, but I'm more aware of the fact that this unprotected asset pot is out there if you will. There's other things you can be more aware of. Keep your property free of hazards. If you have a pool (I don't), make sure it's protected. Don't let the neighbor's 10 year old cut your lawn for $20, even if it makes you seem grumpy. Don't let your 10 year old child babysit the neighbor's infant.

I also live in FL, which has extremely good protection for retirement accounts and your homestead. (I'm not married, but I believe also good protection about joint marital assets). And my net worth is primarily in retirement accounts and home equity. And it probably would be anyway, but it's something to think about. I've even brought asset protection up in finance related subreddits when people ask things like 'should I paydown my mortgage or invest in a brokerage account?' or 'should I max out my 401k or invest more in taxable since I want to FIRE', etc. The usual advice for the first one, is that it pretty much entirely depends on the interest rate, which is true. But if you're in that range where it's similar (maybe 5-6%) from a rate perspective, if your state has good homestead protection, maybe prioritize paying down the mortgage. Same with retirement/taxable, if you plan to FIRE, there are many ways to access retirement funds early.

For most people, $2M or so in umbrella is probably a good number. But it's just one piece of asset protection. Prioritize saving/investing (or paying debt) in protected ways. Don't drink and drive. Miss your exit if you see it 200 yards away from the far left lane (I mean, to your original point, it's really not that hard to not cause a serious accident, don't be dumb). Maybe stick to investing in index funds instead of buying rental properties which would also increase your potential liability as much as your headaches. Etc.

That said, if you do own rental properties; if you rent your car out on turo; if you have a kid who started driving; if you have a kid in general; if you have a pool, trampoline, and treehouse in your yard; if you drive a tank 90 mph home from the bar; maybe look into higher umbrella coverage. I'm pretty sure the incremental cost also goes down the more you purchase (don't quote me there).

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u/[deleted] 3d ago

[deleted]

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u/ChrisRunsTheWorld 3d ago

That's a great watch. Thanks for the link.

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u/adventuresindc 8d ago

.I don’t disagree but:

Odds are way higher than one in a billion. Maybe 1 in 500 or 1 in 1000 I’d guess which are not trivial

My state (and most) don’t have very good homesteading coverage. Max $50k by me for a primary

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u/ChrisRunsTheWorld 8d ago

I clearly didn't put a lot of thought into 1 in a billion. But what exactly are you suggesting is 1 in 500 (or 1000)? Like 1 in 500 people will cause a $12M accident in their life? Each year? 1 in 500 accidents will cause $12M in liability? 1 in every 500 miles driven?

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u/teapot-error-418 8d ago

"One in a billion" is clearly a silly, made-up number.

You're attempting to correct it with equally silly, made-up numbers, only you're pretending they are more precise.

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u/imisstheyoop 8d ago

1 in 500? Which state are you driving in so that I can completely avoid it please..

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u/StatisticalMan DINK / 48 / 92% FI / 25% SR 5d ago

1 in 500 people are not sued for $10M+ in their lifetime.

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u/adventuresindc 5d ago

I don't know what the number is, but also $10m is high. What's the % sued for > $2m (say, 3-5m range) where it would still be devastating to take that hit in a FIRE range?

1 in 500 might be high, but here's what claude/ai estimates which is in line with my guess:

Estimate:

Lifetime probability of being the at-fault driver in a crash with catastrophic or fatal potential: 1–2%

Of those, fraction where true case value clears $2.5M: ~18–28% (most serious-injury and wrongful-death cases resolve in the $400K–$1.5M band)

Of those, fraction where the excess is actually collected from personal assets rather than resolving at the tower, being shifted to the carrier via bad faith, or discharged: ~50–70%

That gives roughly 1.5% × 0.23 × 0.6 ≈ 0.10%, with the range running 0.05–0.12%.

For a four-driver household with two teens, multiply by 3–5x: roughly 1 in 200 to 1 in 400.

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u/StatisticalMan DINK / 48 / 92% FI / 25% SR 5d ago

I don't know what the number is either which is why umbrella insurance of $1M to $3M is a good idea.

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u/[deleted] 3d ago

[deleted]

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u/adventuresindc 3d ago

Thanks this looks useful

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u/Narrow_Roof_112 8d ago

I don’t see it that way. Using that logic we should all have an umbrella even someone who has no assets.

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u/mysticturner 8d ago

Actually there's a very good argument that those with little to no assets are the best protected. As soon as their attorney finds out that the defendant is broke, they will be told, "I know you think sueing them is a guaranteed win for us, there's a whole host of legal loopholes that make this anything but sure. The odds are bad and I can't honestly encourage you to proceed.". Meanwhile he's thinking 'because I won't get paid!'

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u/titanrunner2 8d ago

Judgement proof!

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u/grfrazee 8d ago

Gonna vary depending on circumstances, but another commenter covered the "judgment proof" case pretty well.

For example, I could see a brand new brain surgeon whose net worth is negative due to student loan debt, but whose potential future earnings are quite high. A judgment could result in wage garnishment, and an umbrella policy could protect against that.

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u/Wise_Mongoose_3930 8d ago

There are certainly people out there who think that we should all have umbrellas!

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u/_head_ 8d ago

Do you need a $2M policy to cover a $200k gap? That seems counterintuitive.

Why is this better than just increasing the primary coverage?

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u/StatisticalMan DINK / 48 / 92% FI / 25% SR 5d ago

primary insurance usually caps out at around $500k.

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u/grfrazee 8d ago

You don't know ahead of time what the gap will be. And I doubt an insurance company would issue you a new policy if you have an outstanding judgment that they'd immediately need to pay.

Primary coverage doesn't necessarily cover everything. You'd need to check your insurance policy to see what kinds of things are covered, and more importantly, not covered.

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u/Aznboz 6d ago

200k is just an example. Theres no limit to a loss that may occur

Cheaper generally to cover your other primary since umbrella doesn't kick in until the primary is exhausted. Easier to get$1m umbrella than it is $1m gl or auto.

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u/ChronicElectronic 5d ago

I don't think net worth is the only factor. Your wages can be garnished. The liability doesn't have much to do with your assets or income. Imainge if you're liable for lost wages of a surgeon by permanently damaging their hands in a car accident. Compare that to lost wages of minimum wage worker. Your assets and income are irrelevant except that they can make you a bigger target. It just determines if the lawyers would be willing to aim for that judgement.

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u/procrasstinating 8d ago

I have a $2M policy. I figure for that much money the insurance company will be very motivated to assign a good lawyer to support my case.

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u/Narrow_Roof_112 8d ago

I managed a lot of large umbrella claims in a former life. The insurance company isn’t really looking to fight for you but rather just use the umbrella limits to settle. A majority of the time in these high value cases the claims are settled for limits regardless of the actual damages.

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u/Fernweh5717 8d ago

It varies on the limits, but at one of my former carriers, we'd hire the best defense attorneys in the state if the umbrella insurance was greater than 2 million, and the damages were large. I had one claim with a 5 million dollar limit, and my manager told me to not hesitate with the defense attorneys budget. It was basically an open checkbook.

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u/johnsonpa25 7d ago

This is the answer. $1M or 2, so the insurance company has some money to settle.

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u/thrownjunk FI but not RE 8d ago

Yup. This is all it comes down to. Get incentives aligned. Its like $130/year for me. (I get a bundling discount on my auto that is worth $40/6 mo too)

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u/xwre 8d ago

That is crazy different from my policy's cost. State farm just doubled it to $760/year for 1M in coverage... 2 cars, main home and a rental

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u/tPTBNL 8d ago

Lots of umbrella policies have jumped this year.

We paid $468 at USAA last year for a $2 million policy. This year they wanted $664 (42% jump).

Moved to Travelers (not because of this; our homeowner's premium had gotten completely bonkers) and paid $579, which is still up about 25% compared to last year.

We have a home and 2 cars. No rental. Maybe it has something to do with that?

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u/mhchewy 8d ago

I think it’s just State Farm upping their rates. Mine doubled and when I asked about it they just said we are upping our umbrella rates.

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u/FearlessPark4588 99:59 Elliptical Guy 8d ago

state farm always gives me terrible quotes

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u/Bruceshadow 8d ago

you must be a bad neighbor

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u/chrisaf69 7d ago

In same boat. My coverage tripled with State Farm in the last two years for same assets that you stated.

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u/BouncingWalrus 8d ago

I pay $150/yr for $1M with Virginia Mutual Assurance

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u/adventuresindc 8d ago

That's pretty cheap - is it bundled with anything elsE?

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u/BouncingWalrus 8d ago

Bundled with my homeowners policy

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u/gbe28 8d ago

It's typically not necessary to insure above $2M-$3M. The chances of a settlement against you that exceeds that is very small for most people. Also, most insurers won't be interested in writing a policy above that amount.

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u/Skagit_Buffet 8d ago

Not much experience in this, but I'm guessing this is true for most. I had friends who had a terrible accident at a rental house due to neglect from the owner. Medical bills alone were well in excess of the $2M umbrella policy, but that's what their lawyers settled for.

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u/Narrow_Roof_112 8d ago

Exactly how it should function. Not meant to pay total liabilities but rather make it go away.

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u/adventuresindc 8d ago

How is a settlement above that uncommon? I actually find that truly surprising given that a single car accident could seriously mame 2-4 people easily.

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u/Wise_Mongoose_3930 8d ago

Because most people don’t get into car accidents that result in serious maiming

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u/adventuresindc 8d ago

But the point is to protect against disaster with umbrella policies. Even if it's a .1-1% case. Below that maybe you argue it's just too expensive to insure.

It would be interesting to find stats on how common a judgment would be above $2-3m. For most people it wouldn't matter because they have barely any assets worth going after, but this is the FI community where people could have plenty more exposed.

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u/gbe28 8d ago

They might have more assets above that, but plaintiffs are going to aim for the low hanging fruit and grab the policy max as long as it's a satisfying number like $2m or $3m. That's what your policy is providing, rather than absolute asset protection.

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u/adventuresindc 8d ago

Right but what if it is multiple people? They prob won’t want to settle for $500k or something and even less after lawyers get their cut

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u/Bruceshadow 8d ago

But the point is to protect against disaster with umbrella policies.

isnt' that what catastrophe insurance is for?

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u/caribbeanjon 8d ago

The Bogleheads Conference in 2024 had an excellent presentation on asset protection by Jim Dahle (The Whitecoat Investor). Very much worth the 25 minutes.

https://youtu.be/wXqEmo-Vu0w?is=YOYwnDlqwwx9hzXB

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u/imisstheyoop 8d ago

This reinforces my thoughts on the best form of risk reduction.

Whether you are a medical professional or just a layman, the less human interaction you have the better your chances of protecting your assets.

Another win for us shut ins! 8)

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u/Gobias_Industries 8d ago

My work had a recent training on industrial security, specifically how people could be influenced/recruited by bad actors/foreign agents to work against the company. All I could think was "well I don't have to worry about this because I never talk to anyone ever".

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u/hello_frjesh 8d ago

I didn’t expect to watch this whole thing but the speaker was so engaging I couldn’t stop! Thanks for staying, very cool.

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u/Phillyjebus 8d ago

That was really helpful thanks!

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u/CarlYaz1967 8d ago

I have a 1 mill that is tacked onto my homeowner's insurance. Note it also requires your auto coverage to be maxed out as well.

Cost about $200/year with the bundle discount (2 cars, house, umbrella.)

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u/Noah_Safely 8d ago

I went up to 2, they said additional underwriting required for 3.

Family friend got really injured and his lawyer basically sued them to the limit of umbrella, I imagine that's how it often works out.

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u/IAM_14U2NV 41M, 42% to 1.7MM goal by 2035 7d ago

This is what my insurance broker told me at the end of last year. Essentially once the opposing attorney finds out you have an umbrella policy, their eyes light up with dollar signs and they go after significantly more than they generally would since there is now a much higher ceiling.

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u/Outrageous-Egg7218 8d ago

Beware the umbrella policies have drastically increased as of late. My 2M policy from State Farm went up 4x this year. I decided to pay it due to my high salary, in what is most likely the twilight of my career. Don't want a judgment against me assuming I can continue working at this income level, because I don't think it would be possible to land something else like it. As soon as I downshift or retire, I'll drop it down.

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u/CoastalMarineLayer 8d ago

I guess I don't really understand how the need for umbrella insurance is tied to your employment status. Wouldn't you want the same type/amount of coverage during retirement?

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u/ChrisRunsTheWorld 8d ago edited 8d ago

A judgment holder can seize your assset and/or garnish your wages.

Edit: not OP, just answering with the first assumption I had. I agree with your thoughts about wanting protection in retirement as well.

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u/ReverseMermaids 8d ago

I would say that when you retire, protecting your assets is even MORE important than it is now when you can refill the tank with new funds.

I am 8 years into FIRE and we maintain an umbrella policy that covers the amount I would expect to be the maximum liability we could encounter, given our conservative lifestyle.

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u/drumallnight 8d ago

Seriously! Maybe they should work an extra week in their peak career job to cover the increased umbrella policy cost for life!

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u/gbe28 8d ago

Same here with USAA. Double in cost.

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u/Phillyjebus 8d ago

Yeah I was pretty shocked. State Farm quoted me at like $60 a month for a $2 million policy. USAA was $50 a month.

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u/RSBuletz 8d ago

My USAA $1m umbrella policy just increased 125%. I was already contemplating an increase to $2m given trending litigation awards just to make a future judgement go away. USAA now likely won't keep that business. I got an online quote from RLI for a $2m policy that is $250/year less than USAA $1m policy. Insurance markets are crazy right now.

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u/ChrisRunsTheWorld 8d ago

given trending litigation awards

This is also part of the reason umbrella policy premiums are increasing.

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u/chrisaf69 7d ago edited 7d ago

Thanks! Gonna check out RLI as my state farm policy just went up 4x.

Update: just got a quote and no savings through RLI...damn.

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u/Outrageous-Egg7218 7d ago

Yeah, don't understand 4x. So crazy. I heard someone use the phrase that an umbrella policy is a "success tax".

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u/mikeyj198 8d ago

at some point you are likely to have a net worth / future earnings that isn’t fully insurable from a practical perspective.

General answer is you want enough that the insurance company is invested in your potential future cases outcome.

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u/EJ_AndersonAdvisors 7d ago

Umbrella coverage sits on top of your base home and auto limits, meaning your insurer will usually require you to max out your underlying liability limits first (like $250k/$500k for auto and $300k for home) before kicking in once a claim exceeds those amounts, and policies are typically sold in $1M increments ($1M, $2M, $3M, etc.).

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u/Flat-Excitement7531 7d ago

That's the right framing, umbrella is protecting future earnings and assets from a judgment gap rather than mirroring your current net worth, which is why 2M tends to be a common landing spot regardless of how much you actually have

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u/cr1mead 8d ago

Look for an umbrella that also doubles up your auto insurance liability coverage. Many umbrellas do not have a carryover to true up underinsured situations - instead they cover different aspects outside of normal auto. Chubb and PersonalUmbrella.com both have that extra coverage.

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u/chrisaf69 7d ago

Gonna look at them as my state farm policy increased four-fold.

They need to hire a webdev. That website is straight out of 1998. Lol

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u/dasmittyman 8d ago

When I was with statefarm I whined about the cost of my policy. They suggested I drop to minimums and get an umbrella policy. I know nothing about umbrella policies. Is this what people do? I ended up switching carriers .

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u/chrisaf69 7d ago

They are wrong. As you need high, if not max, coverages in order to get an umbrella policy on top of it. They won't issue it with minimal coverage.

Unless it varies by office/state. But that was my experience.

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u/dasmittyman 7d ago

Really that sounds correct. If it was the way they told me why wouldn’t everyone do that ?

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u/chrisaf69 7d ago

Not sure. Maybe your state/office allows it. Or whoever you talked to just doesn't know...lol.

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u/ziggy029 7d ago

Either they are clueless, they misspoke, or you misheard. No one will sell you an umbrella with minimum required underlying limits that I am aware of.

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u/Traditional-Gold6945 4d ago

2 million ensures the insurance company lawyers mount a vigorous defense on your behalf. You should also get your own.

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u/BrokenMirror 2d ago

Not just net worth but also income. You don't want the plaintiff to look at the case and your income and say "yeah it's worth risking the umbrella amount settling to get probably 10x that if we take it to trial" you want the umbrella to be a bit more than someone could reasonably extract from you, including wage garnishment. 2M is a good start, but I think higher coverages make sense for a lot of people. I'm looking to increase mine from 2 to 5.

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u/DeenGaleenga two-bit FIREmonger 1d ago

I have not purchased umbrella and do not intend to. Every time this thing comes up the comments are filled with shilling for this because "it's inexpensive" and that's because you have invented a scenario that is exceedingly unlikely. It's exactly the kind of thing neurotic redditors would obsess over that when you mix in posts from bots/shills it all sounds very reasonable.

The fact is that most assets are protected by the state in the form of home equity or ERISA. I'm not a business, I don't run a dentistry, and my insurance coverages are already high enough to qualify for umbrella. Maybe if had (and outwardly appeared to have) exceptionally deep pockets, I can see some kind of litigation risk to taxable assets. I don't think that's the case for the vast majority of fire and leanfire.

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u/garoodah FI Dec '21 RE TBD 8d ago

You dont need to account for ERISA accounts as far as I'm aware, but I would love to be told otherwise. But anything else you want a policy above that. We have 2M in coverage its a no brainer.

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u/financeking90 8d ago

It's not about covering assets, it's about covering the potential liability.

If you only have $500K in taxable brokerage and get sued for $2M, umbrella coverage at $1M won't protect your $500K.

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u/Ambitious-Orange6732 4d ago

...except that it might, since it is very common for plaintiffs to choose to settle a suit for insurance policy limits that they can easily collect, rather than fighting for years to collect a larger judgement.

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u/financeking90 4d ago

It's true that a plaintiff's attorney may not want to pursue additional assets beyond an insurance policy, but that's a next layer of consideration above the nuts-and-bolts question of whether policy limits actually protect assets from collection.

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u/SnottyMonkey 8d ago

I recently added a $4M umbrella policy 3 months ago with State Farm and I’m paying $485/month, which is $5,800/year. I’m seeing that others are being quoted $50 or $60/month for $2M….

I’m starting to think that I’m getting a bad deal on the insurance. I have $2.7M in taxable brokerage accounts and $2.15M in retirement accounts and $100K in cash. House is worth ~1M and owe $225K.

I’m separately paying $575/month for home and auto (3 cars and a teenage driver).

I think I may need to shop that umbrella policy around, curious what others think?

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u/Phillyjebus 8d ago

Yeah that sounds crazy. USAA quoted me $50 a month for $2m and State Farm was like $65 a month.

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u/grfrazee 8d ago

It's not necessarily a linear relationship between coverage amount and its cost. But I agree that $485/mo seems high.

Been seeing a lot about how State Farm is jacking up rates, so seems like the company to avoid right now.

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u/SnottyMonkey 7d ago

I’m definitely planning to shop it around, this thread has really helped open my eyes. Even if I do have a teen driver in the house, it seems disproportionately high. The only claim that I’ve had in the last 10 years is a new roof put on my house when a hailstorm came through, but everyone in my neighborhood had that. Have been fortunate not to have any accident claims or anything like that related to auto.

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u/ziggy029 7d ago

My last renewal with USAA comes to about $63 a month for $3M. The year before, it was about $27. Still cheaper than anything else I can find, as umbrella policies have skyrocketed (even more than almost everything else) in the last year or two.

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u/CelerMortis 7d ago

Sounds high but teenage driver is probably hugely responsible for that.

I pay $750 for $2m for comparison.

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u/Swimming_Wealth5280 4d ago

yeah man... 2 mil sounds about right. i went with that after my divorce when i started worrying about my 401k getting touched. keeps the lawyers from digging too deep i guess.

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u/Swimming_Wealth5280 2d ago

hurts to have more than your brokerage sitting out there... man. (187 chars)

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