umbrella policy question

[bobbyr]

I am trying to insure appropriately based on some inheritance money, rental properties (2) and our auto policy. As I was setting up the umbrella policy I counted the following items as items I needed covering under this policy:

- real estate (2 houses, one is a rental/duplex)
- cash and investments

I left out the following items in my calculations:

- IRAs (Roth and Inherited)
- 401k

Is this the proper way to proceed or should I be including the IRAs and/or 401k?

 

[Kings over Queens]

Not sure what you are trying to accomplish?

Umbrella (excess personal liability) policy's do not "cover" IRA's or 401k's.

There is no exact science when it comes to picking a limit of liability protection. There is no way to predict the type of claim that might need to be covered. Example, how injured are the people? How many? How long will it take to settle? The largest claim I personally handled settled for just under $3,000,000, and was for a simple broken ankle. Problem was the ankle was attached to a 40ish old man who drove a truck for a living, and could no longer because the break required his ankle to be fused. Do some quick math for future earnings and break out the check book.

I've always told clients you either buy as much as you can afford, or what lets you sleep well at night.

Keep on thing in mind, the defense money in the lawsuit isn't part of the primary auto, home or the excess limit of coverage. Defense costs for personal auto, home and umbrella are essentially unlimited. The $1,000,000 or $2,000,000 or whatever limit you decide is what is paid to the injured party.

Put another way, the policy you purchase provides a LOT more coverage than you realize, and that anyone might have explained to you.

 

[Car-Guy]

And they are going up... Just got my renewal notice yesterday on mine. Up about 30% from last year.

Also, I expect most (if not all) insurance companies require you to "increase" your auto liabilities coverage from the state minimums to a much higher levels...In my case I had to bump mine to 300k before they'd sell me my 1m umbrella policy. (I think a lot of folks overlook or forget about that additional cost since it's part of your auto liability policy cost and not the umbrella policy.) Caveat Emptor

 

[erkevin]

Sorry Car-guy.....mine renews next week. Went up $7 over last year's.

 

[JBTX]

I am trying to insure appropriately based on some inheritance money, rental properties (2) and our auto policy. As I was setting up the umbrella policy I counted the following items as items I needed covering under this policy:

- real estate (2 houses, one is a rental/duplex)
- cash and investments

I left out the following items in my calculations:

- IRAs (Roth and Inherited)
- 401k

Is this the proper way to proceed or should I be including the IRAs and/or 401k?

You don’t insure particular assets. You get enough insurance to cover what you think your worst case exposure could be.

401ks are protected against creditors regardless
IRAs or Roths may or may not be depending on state, and the origin of the funds (from employer rollover or personal )
Homestead in some states get protection.

As to a rental property, you’d need to check to see if claims related to it are covered under the policy. It may not be as often business claims are excluded from personal umbrella policies.

FWIW out umbrella policy just went up, a lot. I may have to reevaluate.

 

[Car-Guy]

Sorry Car-guy.....mine renews next week. Went up $7 over last year's.

Me too. I expected an increase, but 30%. Looks like I'll be calling my agent again to find out what's their excuse this time.

 

[bobbyr]

Not sure what you are trying to accomplish?

Umbrella (excess personal liability) policy's do not "cover" IRA's or 401k's.

Yes, sorry ...my wording wasn't great. I am trying to determine the amount of umbrella coverage I need to sufficiently protect our holdings (which brings into questionm which holdings would be targets for a suit if I didn't have the policy).

If I had 500k in real estate, 500k in cash and investments and 500k in IRA and 500k in 401k, would i want to get a 1m, 1.5m or 2m policy?

 

[Aerides]

Yes, sorry ...my wording wasn't great. I am trying to determine the amount of umbrella coverage to sufficiently protect our holdings (which brings into questionm which holdings would be targets for a suit if I didn't have the policy).

Well let's say they all add up to $2m. You can insure for that, and someone can still sue you for $5m. It's not like assets cap liability claims.

What I've read here before, is you insure to a number that you can expect the insurance Co. to show up with a good lawyer.

 

[bobbyr]

Also, I expect most (if not all) insurance companies require you to "increase" your auto liabilities coverage from the state minimums to a much higher levels...In my case I had to bump mine to 300k before they'd sell me my 1m umbrella policy. (I think a lot of folks overlook or forget about that additional cost since it's part of your auto liability policy cost and not the umbrella policy.) Caveat Emptor

yes, we ran into the same.

 

[bobbyr]

Well let's say they all add up to $2m. You can insure for that, and someone can still sue you for $5m. It's not like assets cap liability claims.

What I've read here before, is you insure to a number that you can expect the insurance Co. to show up with a good lawyer.

I've read the same regarding your last sentence (probably on this site recently)...IOW, you are paying for the confidence that they (InsCo) would strongly want to win

 

[Dash man]

Yes, sorry ...my wording wasn't great. I am trying to determine the amount of umbrella coverage I need to sufficiently protect our holdings (which brings into questionm which holdings would be targets for a suit if I didn't have the policy).

If I had 500k in real estate, 500k in cash and investments and 500k in IRA and 500k in 401k, would i want to get a 1m, 1.5m or 2m policy?

You’re thinking about this wrong. The umbrella policy is not to protect individual assets. They may sue for more than your net worth if you’re at fault for an accident that severely injured someone and they can’t work and need lifetime medical care. They could garnish wages and such. They wouldn’t be able to touch social security, pensions or 401k retirement accounts. IRAs depend on the amount and state law.
If you have a rental, minor children driving, or other increased risk factors, you should buy what you can afford, not just what covers your “at risk” assets.
We have a $5M umbrella on top of our $1M auto and home liability policies. Why? Because we own five homes. Two have our sons and their families living in them. One is a short term rental that may have six different families of up to 13 people in it during the summer. We also have my FIL who is 90 and still drives that lives with us.
With $6M in total coverage, our insurance company will get some good lawyers for our defense if needed. I’d also rest easier if a severely injured person could receive the care they need if I’m at fault for their injuries.
The umbrella coverage is the cheapest insurance I’ve got, and maybe the most important.

 

[Kings over Queens]

If I had 500k in real estate, 500k in cash and investments and 500k in IRA and 500k in 401k, would i want to get a 1m, 1.5m or 2m policy?

How much are you going to be liable for in the event of a claim?

Buy that much.

Or, buy as much as you can afford, or feel comfortable carrying.

There is no mathematical formula to use to determine how much to buy.

 

[SecondAttempt]

And they are going up... Just got my renewal notice yesterday on mine. Up about 30% from last year.

Also, I expect most (if not all) insurance companies require you to "increase" your auto liabilities coverage from the state minimums to a much higher levels...In my case I had to bump mine to 300k before they'd sell me my 1m umbrella policy. (I think a lot of folks overlook or forget about that additional cost since it's part of your auto liability policy cost and not the umbrella policy.) Caveat Emptor

This is what I've run into. I've carried umbrella coverage for almost 30 years. I'm not a lawyer or an insurance expert. The insured amount should be based on your risk exposure, how much you might be sued for. If your life has minimal impact on others, your exposure might be low. But you can have damaging impacts to others without knowing it. Maybe you did some landscaping that led to flooding of your neighbor's house.

I disagree somewhat with the (apparent) lawyer who answered above and here's why. Your assets are irrelevant when calculating damages. But no lawyer is going to take a high damages case if there is little chance of ever collecting even if they won. So they will search your assets (and this is pretty easy to find in databases) and if you have a lot they might be more likely to sue. I might be mistaken but I believe IRAs can be recovered from if you lose a lawsuit but 401(k), 403(b), and similar accounts cannot because they are not technically yours.

My umbrella policy only costs about $130 per year for $1 million coverage and primarily gives me peace of mind. But I have to maintain $100,000/$300,000 liability limits on my vehicle and homeowner's policies and the extra coverage on the underlying policies costs way more than the umbrella policy itself. For this reason I've though of carrying higher umbrella coverage since the incremental cost of $2 million or $3 million is not that much and there would be no additional cost on the underlying policies.

If anything I've said is wrong please correct me. This is just what I've learned from having an umbrella policy for almost 30 years and discussing it at times through the years with a couple of attorneys I was paying for estate planning or similar work and also with a few insurance agents.

You might want to speak with a knowledgeable insurance agent. There are some professions that pay much higher rates and have more exposure. They are not always what you expect. Teachers are one for example.

 

[bobbyr]

You’re thinking about this wrong. The umbrella policy is not to protect individual assets. They may sue for more than your net worth if you’re at fault for an accident that severely injured someone and they can’t work and need lifetime medical care. They could garnish wages and such. They wouldn’t be able to touch social security, pensions or 401k retirement accounts. IRAs depend on the amount and state law.
If you have a rental, minor children driving, or other increased risk factors, you should buy what you can afford, not just what covers your “at risk” assets.
We have a $5M umbrella on top of our $1M auto and home liability policies. Why? Because we own five homes. Two have our sons and their families living in them. One is a short term rental that may have six different families of up to 13 people in it during the summer. We also have my FIL who is 90 and still drives that lives with us.
With $6M in total coverage, our insurance company will get some good lawyers for our defense if needed. I’d also rest easier if a severely injured person could receive the care they need if I’m at fault for their injuries.
The umbrella coverage is the cheapest insurance I’ve got, and maybe the most important.

very helpful, thank you.

 

[Kings over Queens]

The insured amount should be based on your risk exposure, how much you might be sued for.

I disagree somewhat with the (apparent) lawyer who answered above and here's why. Your assets are irrelevant when calculating damages. But no lawyer is going to take a high damages case if there is little chance of ever collecting even if they won.

I cherry picked these two comments for reply.

I agree to a certain extent that that you should pick a limit based on your risk exposure, however, with liability coverage, there is no mathematical equation to calculate it. In my defense, I didn't suggest to purchase a limit based on how much you might be sued for, but rather, how much you might be "liable" to pay in the event of a claim. Big difference.

Your second comment mentioned damages, which is what are awarded at the conclusion of the lawsuit. At the same time, your first comment and second seem to conflict. If you should pick a limit based on your risk exposure, then clearly you must consider your assets. No?

This question comes up often, how much should I carry, and it's easy to complicate what should be easy. Lets look at it another way.

There are essentially 5 options with excess liability (I'm really simplifying it), being $1,000,000, 2,000,000, 3,000,000, 4,000,000 and 5,000,000. Sure, you can go higher, but for the sake of discussion, most people are going to fall into this range.

Putting a laborious analysis of assets and exposures to the side, which of those 5 options make you (the purchaser) most comfortable?

Assume for a second that 1,000,000 cost $300, and 5,000,000 cost $1,000 (gross estimations for sake of discussion), with the other options in the middle. How much can you afford, or are you willing to budget? Is it $500? Then buy $2,000,000, or 3.

 

[Sunset]

We carry $2 Million, simply because most folks these days would consider $1 million not enough to win and will want more...

 

[LateToFIRE]

I carry $1M umbrella liability policies on each of my homes and properties, and an additional $5M umbrella general liability policy.

Here's my reasoning:

1) As a HNW couple, I figure we are more vulnerable than most to nuisance lawsuits in general
2) As owner of rental properties, certainly makes litigation even more of a hazard, even though tenants are required to carry insurance and name us on it.
3) We constantly have a lot of contractors and service people on our properties sometimes doing hazardous work (housekeeping, gardening/grounds, pool, etc.), you never know if their insurance is in force
4) Having a swimming pool in particular is a big liability (scenario where drunk teens break in and somebody drowns in pool but you're held liable...)
5) I sit on boards, they all have D&O insurance but, I want my own protection - litigation (or at least the threat of litigation) happens more often than you'd think even with charitable stuff [P.S. you have to make sure your policy specifically covers this risk, not all do].
6) Have owned, and still sometimes rent boats. In a past vastly more jetsettish life it occurred to me that accidentally colliding into the wrong mega-yacht in the wrong harbor could cause property damage into the hundreds of thousands of dollars (not to mention potential for medical injuries). [P.S. this is another area you have to make sure covered, some policies exclude]

The last one really convinced me to up the $ amount of insurance. Boats are a lotta fun but a reasonably hazardous, accident-prone past-time. Hazardous as cars, but subtract airbags, seatbelts, road dividers, traffic lights, and then add that traffic can come at you from any direction, that everything is wet and slippery and bouncy, that other drivers are 10x more likely to be inebriated, and that guests are prone to doing stupid things when you're not looking.

 

[yclipse]

Umbrella insurance is excess liability insurance, over your first layer of liability coverage. Asking it to "cover" cash or retirement benefits makes no sense.

You identify your activities and how they might lead to a negligence claim in a lawsuit. Owning a car, driving a car, owning or renting a home/apartment, owning vacant land - all are activities that might give rise to a claim if you do something negligent or someone claims that you did. Pushing a cart in a supermarket aisle and running down a little old lady that you didn't see is normally covered under the "floating" personal liability insurance included in your homeowner's or renter's coverage.

 

[Huston55]

Seems to me that the most relevant data for deciding how much liability coverage to have is based on what actual damages are paid in personal injury lawsuits. BTW, 95% of suits are settled.

Here’s a good relevant article from Forbes, with key data excerpted and link to article below.

“Some insight (at least as of 2005):

Half of all plaintiffs received $24,000 or less.
The median award was $31,000 for all cases studied.
The median amount awarded in auto accident cases was $16,000.
The median award in premises liability cases — cases holding owners or landlords liable for injuries sustained due to the condition of the property — was $90,000.
The average award for medical malpractice cases was $679,000.
The median payout for product liability cases — cases involving flawed products like medicine with unknown side effects or a lawn mower that explodes whenever it gets hot — was $748,000.”

https://www.forbes.com/advisor/legal/personal-injury/personal-injury-settlement-amounts/

 

[ncbill]

Well let's say they all add up to $2m. You can insure for that, and someone can still sue you for $5m. It's not like assets cap liability claims.

What I've read here before, is you insure to a number that you can expect the insurance Co. to show up with a good lawyer.

Claims against individuals who have umbrella excess coverage settle within the total coverage limits.

If the defendant has $2 million in umbrella & $500k on the underlying auto policy, no matter how bad the auto accident a plaintiff will settle within the $2.5 million combined limit.

If the plaintiff tries to go for a higher settlement when an offer for the combined limits above is already on the table their contingency-fee attorney would fire them as a client.

 

[bobbyr]

Claims against individuals who have umbrella excess coverage settle within the total coverage limits.

If the defendant has $2 million in umbrella & $500k on the underlying auto policy, no matter how bad the auto accident a plaintiff will settle within the $2.5 million combined limit.

This is what I thought was the case.

 

[Car-Guy]

So for someone who has the vast majority of his/her NW in IRA's, 401k's and in their Homestead (using Texas residence for an example), do they really need an umbrella policy in addition to their normal liability coverage in their homeowners and auto policies?

The text below was taken from one of the Texas law firms and many have similar text.

In addition to insurance planning, the first level of planning uses statutory exemptions provided by Texas law to protect assets from creditors. Texas, as a debtor-friendly state, provides debtors with generous exemptions to protect assets that are directly owned by the client. For example, the total value of a debtor’s homestead is protected, regardless of its value, from seizure by creditors. Retirement accounts, such as IRAs and 401(k) plans, are also protected from creditors. Texas goes further than most states by protecting retirement accounts even if they are inherited accounts. (Please note that the laws vary from state to state.)


Anyone have an educated opinion?

 

[LateToFIRE]

Claims against individuals who have umbrella excess coverage settle within the total coverage limits.

If the defendant has $2 million in umbrella & $500k on the underlying auto policy, no matter how bad the auto accident a plaintiff will settle within the $2.5 million combined limit.

If the plaintiff tries to go for a higher settlement when an offer for the combined limits above is already on the table their contingency-fee attorney would fire them as a client.

But as Huston55 posted, and my observations reflect, most settlements for the run of the mill accident stuff don't come anywhere remotely close to $2.5M. The most I've ever seen in auto-related was around $100K and that was a situation where there was a death due to a very clear-cut case of speeding and reckless driving. I think the higher $ amounts occur in cases where there is tangible property damage - you swerve to avoid something in the road and end up plowing into someone's [custom-built from reclaimed antique wood, designer, party] barn. Well, the barn owner probably has property coverage, but you get sued to recover their deductible + their insurance co sues to recover the damages they had to recover.

Now, all that said, true, I have millions of dollars of coverage, but that is because I engage in stuff that could result in big dollar damages (a boating accident [say I collide with Bezos's new yacht], a board of director lawsuit, an injured tenant, household worker or contractor, etc.). Really, the insurance is largely intended to cover to cost of the litigation.

 

[Kings over Queens]

This is what I thought was the case.

Of the claims I've observed, the insurance company attorney's always push for a stipulation to settle within policy limits. My observation has been when there is usually more than one plaintiff, and there are substantial injuries, the insurance company will ultimately offer up policy limits and tell them "you figure out how to divide it."

Keep in mind that $1,000,000 plus whatever you carry on the car or house liability adds up to a lot of money, especially when defense costs do not erode that limit of coverage.

 

[COcheesehead]

I carry a lot. Why? I’ll likely get a better defense if they have more to lose.