Umbrella Insurance: How Much Is Enough?

Tuesday, February 17th, 2015

Are your assets adequately protected?

These days, lawsuits are common and judgments can be substantial. The more assets you own, the more vulnerable you are. Personal excess liability (aka “Umbrella Insurance”) policies provide you an additional level of liability protection beyond the coverage offered by your basic insurance policies. While there is no one-size-fits-all approach to determining the perfect amount of excess liability insurance coverage to hold, here are several important considerations:

  • The most common method for determining how much umbrella insurance to buy is to match your total liability coverage to your net worth (everything you own minus everything you owe).
  • In today’s litigious society, a lawsuit may result in garnishment of future earnings. If you have high future income potential you should consider purchasing additional coverage on top of your net worth.
  • In some states, assets held in 401(k) and other employer-sponsored retirement plans are sheltered from lawsuits and creditors. Residents of these states may find it appropriate to obtain coverage equal to their net worth less the value of 401(k) or other employer-sponsored retirement plans. Bear in mind, however, that the same degree of protections are rarely offered for IRA accounts. In Colorado, for example, IRA and Roth asset protection is excluded for certain types of judgments such as unpaid child support.
  • While umbrella insurance tends to be relatively affordable in sums ranging from $1 million to $5 million, premiums rise disproportionately at higher levels of coverage due to the smaller number of policies over which the insurer can spread their risks.
  • For high-net-worth individuals, the objective is to balance an acceptable level of risk with the cost to insure. In such cases, it may not be prudent to insure one’s entire net worth.  Also note the premiums in the upper echelons of coverage will vary noticeably by insurer depending on the company’s client base. For example, State Farm tends to cater to a middle and lower income subset of the population. This allows the company to be more competitive in the $1 million marketplace but less so at the $10 million-plus marketplace where a high-net-worth insurer can better spread the peril.
  • Remember net worth is not a static number. As you accumulate or spend assets, your policy should be reviewed annually and adjusted as necessary for changes to your net worth.

A special note: It is important to ensure the maximum liability payout on your homeowners and auto policies match the amount at which your umbrella policy payouts begin.

While a single blog post cannot determine the right amount of coverage for everyone and should not be construed as individual advice, we hope this discussion provides context and ideas for making an important financial decision. Check back in two weeks for discussion on the financial planning process.