Rethink umbrella insurance – for high incomes and high net worth individuals

Umbrella insurance is a hard sell for most people. Why? Because the concept of a catastrophic event that can be a game changer for your life and comfort is not something that most people think about. Moreover, the concept is more abstract than, for example, a specific asset, such as a house and your car or boat.

Nevertheless, if you have assets worth protecting or have a significant income, you should seriously consider purchasing a decent amount of umbrella coverage. Many people think it’s a waste of money, others think everything is too good to be true, it won’t be there when you really need it. Still others believe that nothing catastrophic will ever happen to them.

One very smart and successful entrepreneur even told me, “Listen, if I can’t even calculate my overall risk, how on earth can I insure against it?”

He is partially right. In all other insurance policies you have a method to calculate your final damage. Car damage, loss of life (yes, you can monetize income risk through actuarial tables), house, personal items… everything can be quantified. And so it makes sense to insure against it.

But how do you quantify a disaster?

And yet I have seen people’s lives turned upside down by a catastrophic event. So here’s how to insure against that kind of risk.

Let’s make something clear first. An umbrella risk does not cover things like medical bills, unemployment, loss of life, tax liability or fines, or disability. It does cover you for the following types of liability:

  1. Personal damage
  2. Legal defense costs
  3. Auto related liability
  4. Property damage
  5. Personal liability such as libel or defamation suit

In other words, Umbrella insurance is in addition to your other specific risk insurance policies. So a dog bites someone while they are on your property and they sue, that damage is covered.

So how to assess the amount of risk. Well, a general rule of thumb is 10 years of income and market value of your assets plus normal inflation. If you have $5,000,000 and expect to make $2,000,000, you would insure for about $10 million.

Most Umbrella policies have certain exclusions. Go through them very carefully. Common exclusions include: damage to your own property (covered by home contents insurance), self-inflicted and intended damage, and damage arising from certain exotic vehicles.

As I said, discuss the exclusions very carefully and also the reasons why the policy may be cancelled.