You have worked hard to accumulate a retirement account and a wealth of other assets, but the fact that you have this level of success can also make you a target. Your success makes you the holder of the deep pockets that others may be wanting to raid.
What is Umbrella Insurance?
Car insurance protects you from the legal backlash of a car accident; homeowners insurance protects you from someone getting hurt on your property, but what if these claims exceed your insurance limit? Maybe the damage you caused in a car accident is $500,000 when your limit is $200,000. Where would you get the other $300,000?
Without umbrella insurance, this additional $300,000 would come from your personal assets. Umbrella insurance fills in these insurance gaps.
In addition to filling in the claim gaps, umbrella insurance covers you for all other suits that aren’t typically insured. If someone comes after you for libel, defamation, or slander, then umbrella insurance would be there for the payout. This coverage is also for accidents that don’t happen in a car or on your property.
If your lifestyle includes activities that put you at a higher risk of being sued, then umbrella insurance is a requirement, not an option. These type of activities include:
- Owning dogs, the insurance company may have breed restrictions
- Volunteering or coaching kids sports
- Owning homes or vacant property, especially rental properties
- Having a pool or trampoline
- Sports or hobbies where you could easily injure someone else (hunting, boating, skiing)
How much to get
When purchasing umbrella insurance, you want enough coverage to match or exceed your net worth. Other considerations include future earnings. If you are going to have a substantial increase in income, then you will want to protect this as well. The need for assets or a high salary is why umbrella insurance is usually not a consideration until the insuree has something substantial to protect.
Becoming a Target
As your wealth increases there will be shady characters, who want a piece of the pie. This risk is the same reason that many lottery winners are introduced to family members they never knew they had.
This target is exceptionally bright for early retirees. Once you’ve retired early, others will notice. They don’t know that early retirement doesn’t require you to win the lottery, all they know is that you have a bank account flush with cash.
The catch 22 is that having umbrella insurance also makes you a target because it alerts others that you have valuable assets to protect. However, unlike early retirement, hiding umbrella insurance is very easy. The fact that you have a policy is between you and your insurance representative.
What does it cost?
Umbrella insurance is inexpensive because the probability of you having a claim that exceeds your current insurance limits is low. Policies are usually created in increments of $1m. A policy of $1-2 million should only cost a few hundred dollars per year. A small price to pay for the potential of a detrimental blow to your financial independence and retirement plans.
You will or have already spent a lot of time and effort building a financially sound future. Why let all of that disappear as a result of an accident? Spend the relatively small amount and protect your assets and your financial independence.