When to Buy an Umbrella Policy
/Who needs an umbrella policy?
If you have a net worth of $500K or more, consider purchasing an umbrella policy. Even if you don’t have much in the way of assets yet, but you are a high-income earner, you should still consider this coverage since future income could be awarded in a lawsuit if you are found to be negligent.
How an umbrella policy works
If you are in a car accident and are sued for $1M, typically your auto liability coverage will step in first. The max coverage for most policies is $500K. If your net worth is $1M or more, then you are exposed to that extra amount. If you have an umbrella policy, it will kick in for that remaining balance and protect your assets. Similarly, if someone gets hurt in your home, an umbrella policy can provide additional protection and supplement the home insurance policy.
How much does an umbrella policy cost?
$1M umbrella coverage can be as low as $200 per year. You may have to increase the underlying home and auto liability coverages first. For example, if your home policy only has $300K as the liability coverage, you may be required to bump that up to $500K before securing the umbrella policy. The result with a $1M policy is that you would have $1.5M dollars of protection.
Are retirement assets protected from lawsuits?
Sometimes. It will depend on the type of account and the state that you are in. OJ Simpson was found liable in civil court and had to pay millions of dollars of compensation. He had a defined benefit plan with the NFL and that ended up being protected from his creditors because it was an ERISA plan. There are some protections for retirement accounts, but something as simple as doing a direct rollover from an old employer's 401k to an IRA, which is extremely common, can remove that protected status. In practice, most people want to simplify their financial lives and have fewer accounts or to move their money to where they can have lower-cost investment options. Therefore, we recommend obtaining enough liability insurance to cover your net worth. That ensures that if something unexpected happens, you can be made whole financially.
Review your insurance policy limits periodically.
Once you obtain the necessary coverage, review the amount at least once a year. If you receive an inheritance or large bonus or if your assets have grown consistently over time, you may need to add another $1M of coverage to remain fully protected.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.