When it rains, it pours. A key component of personal risk management is to have proper liability protection. If you own a car or rent/own a home, you likely have an insurance policy to protect yourself in the case of loss (e.g., your house burns down) or liability resulting from that asset (e.g., your neighbor falls on your icy driveway).
Most people purchase these policies early in life and forget about them other than the yearly cost. Don’t do that! It is extremely important to understand your policy’s liability limits.
For example, your policy may cover you for up to a certain amount of personal liability per person and per occurrence. If your net worth is low, you may not pay much attention to these limits. But over time as your net worth increases, you must make sure your personal liability limits on your insurance policies exceed your net worth, or at the very least your assets that could be subject to a claim against you (e.g., your home equity, your taxable investments, etc.).1 Now this rule of thumb is fine, but at a certain point your net worth may exceed the limits for your automotive, renter’s or homeowner’s policies. The limit varies by insurance company, but it is usually about $500,000 to $1,000,000 of maximum personal liability coverage. So, what happens if your assets are above these limits? You are likely unprotected!
Let’s look at an example list of assets:
The person above has a net worth of $4,500,000.
Let’s say the person above has insurance policies (automotive and home) with $1,000,000 in personal liability protection. Are they protected?
No!
They have $1,000,000 of protection but have at least $3,250,000 in assets available to creditors (the 401(k) is protected from creditors and I assumed their state doesn’t protect their primary home). If they were sued, they would be underinsured by $2,250,000. When it rains, grab an umbrella.
An umbrella policy is a personal liability policy that stacks on top of your existing personal insurance policy limits. Most insurance companies will mandate you a minimum amount of personal liability protection on your automative and renters/homeowners policies (usually $500,000 to $1,000,000) to purchase an umbrella policy.
You then purchase an umbrella policy in million-dollar increments, usually for around $100/year per $1,000,000 of additional coverage. In the example above, the person would likely want to purchase an umbrella policy of $3,000,000 in coverage to provide ample protection above their existing policies.
As your net worth increases, it is important to make sure the personal liability insurance you have provides ample coverage. If you have a high to ultra-high net worth and don’t have an umbrella insurance policy, it is essential to make sure your assets are properly protected.
As a Financial Advisor, I assist my clients in understanding their risks and addressing those needs cost-effectively. In the case of umbrella insurance, a few hundred dollars a year can be the peace of mind against an otherwise life-altering situation. If you want help understanding your financial risks and how to protect yourself, please contact me directly at peter@onedayinjuly.com.
1. The exceptions to this rule are many forms of IRAs and employer-sponsored retirement plans (e.g., your 401(k)).
2. One Day In July “ODIJ” and Peter Egolf are not insurance agents/brokers. We do not sell insurance and
are not affiliated with anyone that sells insurance policies.
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