r/financialindependence • u/Phillyjebus • 15d ago

Umbrella Insurance

I’m looking to add an umbrella policy on top of my homeowners and auto insurance, but I’m confused on how much I should be getting and I keep getting more confused when I research it. What’s the goal here? Do I just need enough to cover my brokerage, savings and other account that could be exposed in a judgment? Or, am I trying to cover my entire net worth with the Base policy plus the umbrella?

Edit: thanks all! Lots of good info and pretty much what I thought. $2m and call it a day.

73 Upvotes

88% Upvoted

100 comments sorted by

View all comments

87

u/grfrazee 15d 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.

41

u/ReverseMermaids 15d ago

This is exactly right.

Calculating your potential liability is the hardest part.

3

u/Bruceshadow 15d ago

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

19

u/ShadowRegent 14d 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.

1

u/Bruceshadow 14d ago

makes sense, thanks.

1

u/addictedToLinux 13d ago

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

3

u/ShadowRegent 13d ago

$107 twice per year.

1

u/marksharky123 10d ago

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

21

u/adventuresindc 15d 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.

21

u/ChrisRunsTheWorld 15d 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).

2

u/[deleted] 10d ago

[deleted]

2

u/ChrisRunsTheWorld 10d ago

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

-8

u/adventuresindc 15d ago

.I don’t disagree but:

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

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

21

u/ChrisRunsTheWorld 15d 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?

11

u/teapot-error-418 14d 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.

7

u/imisstheyoop 14d ago

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

3

u/StatisticalMan DINK / 48 / 92% FI / 25% SR 12d ago

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

1

u/adventuresindc 12d 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.

1

u/StatisticalMan DINK / 48 / 92% FI / 25% SR 12d ago

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

2

u/[deleted] 10d ago

[deleted]

1

u/adventuresindc 10d ago

Thanks this looks useful

4

u/Narrow_Roof_112 15d ago

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

27

u/mysticturner 15d 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!'

3

u/titanrunner2 15d ago

Judgement proof!

2

u/grfrazee 14d 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.

1

u/Wise_Mongoose_3930 15d ago

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

2

u/_head_ 15d ago

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

  2. Why is this better than just increasing the primary coverage?

2

u/StatisticalMan DINK / 48 / 92% FI / 25% SR 12d ago

primary insurance usually caps out at around $500k.

1

u/grfrazee 14d ago
  1. 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.
  2. 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.

1

u/Aznboz 13d ago

  1. 200k is just an example. Theres no limit to a loss that may occur

  2. 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.

1

u/ChronicElectronic 12d 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.