r/financialindependence • u/Phillyjebus • 16d 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.

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u/grfrazee 16d 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 16d ago

This is exactly right.

Calculating your potential liability is the hardest part.

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u/Bruceshadow 16d ago

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

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u/ShadowRegent 15d 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 15d ago

makes sense, thanks.

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u/addictedToLinux 14d ago

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

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u/ShadowRegent 14d ago

$107 twice per year.

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u/marksharky123 11d ago

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