Why every high earner should have umbrella insurance
What is umbrella insurance and how much does it cost?
If you have a little bit of money saved up, then you probably are interested in protecting it. Umbrella insurance is a low cost way to mitigate risks and protect yourself from personal liability lawsuits and claims. Because umbrella insurance is purchased in addition to your home and auto policies -and only kicks in when those have been exhausted- it can be exceedingly affordable, even for relatively large amounts of coverage ($1m+).
Because umbrella insurance is so cheap, I firmly believe that every high earner should at least consider it. But, before I get more into that, I think it’s important to discuss what umbrella insurance covers.
What does umbrella insurance cover?
You can think of umbrella insurance as coverage that is “over and above” the coverage of your auto and home policies. In most cases, you can only purchase umbrella insurance when you already have those other policies, at a fairly high coverage level. In my case, the umbrella policy is for $1m, the auto is $250k/500k, and the home and renters policies are both $100k. Those are the minimum coverage levels for auto and home that are required to purchase umbrella insurance through my insurance company, Liberty Mutual.
My umbrella policy covers all of the things that my auto and home cover, but up to $1m. The umbrella policy also covers a host of other things.
Things my umbrella policy covers that my auto and home insurance do not:
Harm caused by pets, accidents or other people on your property
Imprisonment, detention or false arrest
Other personal liability situations
Damage to property caused by children
Personal injury to a renter of your propery
Keep in mind that every policy is different, so there is no guarantee that your umbrella policy will cover those things.
Things that umbrella insurance does not cover
Depending on the insurance company, there are also a large number of things that umbrella insurance does NOT cover. Think of the list below as the short list -you can pretty much guarantee that every insurance company will have a list of exceptions longer than the Great Wall of China.
Illness and communicable disease (someone sues you for giving them a disease)
Intentional or criminal acts
Disputes about contracts
Business affairs (this is personal liability coverage, after all)
Your personal property (this is liability insurance, not property insurance).
How much does umbrella insurance cost?
Now that you know what umbrella insurance covers, you probably want to know how much it costs.
Umbrella insurance is always purchased on top of auto and home liability coverage. In my case, those policies cost around $3500 a year, and my umbrella coverage costs $239 per year.
$239 per year for $1m in coverage!
Not everyone will get that rate, obviously, but it does go to show you just how cheap coverage is for umbrella policies. Insurance companies can afford to offer such low rates because umbrella insurance rarely comes into play; most personal liability claims will end up being covered by the auto or home policy of the insured, which is why the insurance company makes you purchase those policies as well.
What’s more, each additional ratchet in coverage costs less than the previous amount, because the likelihood of you needing the coverage gets lower as you raise the amount. Suits of $100k are more common than $2m suits.
Who should get umbrella insurance?
Because umbrella insurance is so cheap, to me it is a mandatory purchase for any high earner with a net worth more than $100k. It’s also particularly attractive for those with rental properties, kids, and pets since the breadth of coverage in an umbrella policy extends beyond the footprint of your home and auto policies.
Those with less to protect should evaluate umbrella insurance as well (I mean, it’s not very expensive), but it’s important to keep mind that a large amount of coverage may increase the likelihood of a suit. In other words, with $1m in coverage, you have $1m that someone can sue you for.
Whether you choose to buy liability insurance or not is your choice, and there are good reasons not to. For me, it’s an easy decision to renew my umbrella policy each year and sleep a little better at night.