How much umbrella liability insurance do I need?

Welcome to this month’s Ask the CFP segment. This month’s question is, “how much umbrella insurance do I need?” As recap, umbrella liability policies are insurance policies that go above and beyond the insurance you may already have in place for your vehicles, homes or watercraft. So why would someone want additional insurance beyond their existing policies?

Let’s say you cause a car accident on the highway and six vehicles are involved. If multiple people face injuries, you could be at fault for a hefty amount of bodily injury liability claims. Medical helicopter rides can be tens of thousands of dollars alone. I know this from personal experience. If your auto insurance policy only covers $250,000 per person and $500,000 per accident, but your collision brings about an $800,000 liability judgement, your personal assets may be at risk. This is why many people use umbrella policies.

Aside from bodily injury liability protection, umbrella policies may also cover defense costs in a malicious prosecution, false arrest, libel or slander. They often cover family members living in your household too, such as a teenager that drives a covered vehicle. Speaking of teenagers, if yours throws a party in your home while you’re out of town and you’re sued after someone falls down the stairs, your umbrella policy may protect you from that unfortunate accident.

The smallest benefit amounts for umbrella policies are generally $1MM dollars. That may sound like a lot of coverage, but you may be surprised to learn they often cost hundreds of dollars per year in premium, not thousands. So how much umbrella protection does someone need? If your net worth is $2MM dollars and you’re held liable for a large judgement and defense costs of $3MM dollars, then a $1MM dollar umbrella isn’t going to protect you. Affluent families may need umbrella coverage greater than their net worth. After all, lawsuits typically occur when plaintiffs feel they can sue someone that has wealth. Otherwise, why sue someone who has no wealth and likely low levels of insurance?

Determining how much umbrella coverage to secure involves looking at your net worth, but also considering how likely you are to be held liable for outsized judgements. For example, judgements can vary widely based on the circumstances, but judgements of $10MM dollars or more tend to be less common than judgements of around $1MM dollars. Also, some of your assets may already have protections in place such as ERISA protection on retirement plans such as 401(k)s or business interests in LLCs. Therefore, it’s less about using your total net worth for this calculation and more about using your net worth that’s likely at risk from a lawsuit.

Overall, this may help you come closer to the amount of umbrella liability protection you may need. It’s different from person to person and even from state to state based on different laws, so speak with a professional to understand where you may be at risk and how to protect your family. If you have a question about this topic or have a question for next month’s video, please send it to [email protected]. Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.?