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Return To: Umbrella Insurance – The Ultimate Guide
Getting insured is one of the best investments you can make in your life. When you’re insured, you can take care of your family when emergencies occur and have solutions to common financial problems, such as paying off your home mortgage and other debts.
However, no single insurance policy can provide coverage for all of your emergencies. For example, your auto insurance will not cover all of the expenses incurred during an accident.
Paying extra money because your auto insurance policy is limited can cause stress. Fortunately, this is something that an umbrella insurance policy can help you with.
Do I Need an Umbrella Insurance Policy?
Before you determine how much personal umbrella insurance is enough, you need to understand what umbrella insurance is and what kind of coverage it provides.
Generally, umbrella insurance is one type of insurance designed to provide extra liability coverage over and beyond another insurance policy, like your homeowners or auto insurance.
For instance, if your teenage driver caused a car accident that required you to pay $500,000 for property damage and your auto liability coverage only goes up to $300,000, your umbrella insurance policy will pay for the remaining $200,000.
Although uncommon for some, everyone can benefit from umbrella insurance. Getting this kind of insurance will prevent you from paying out of pocket for another person’s legal or medical bills if you’re found responsible for the situation.
How Much Umbrella Liability Insurance Do I Need?
Now that you know how vital umbrella insurance is, it’s now time to determine how much coverage you need. This information is vital to ensuring that you’ll end up getting umbrella liability insurance that provides the most coverage.
Umbrella liability insurance is often sold in increments of $1 million coverage limits and costs roughly around $150 to $350 annually for the first $1 million of coverage. However, keep in mind that these rates will vary depending on where you live, the experience of the insurer in your area, and the number of homes, cars, and boats that you want to get insured.
There is no way to calculate EXACTLY what liability limits a person needs, it is important to to walk through an exercise like this. The fact is, anyone can sue anyone for any amount of money!
People buy umbrella insurance for peace of mind, while understanding you can never account for every possible scenario.
How To Calculate How Much Umbrella Insurance You Need
Step 1 – Calculate Gross Amount Or Real Assets At Risk
- Value Of Real Estate
- Value Of Closely Held Business
- Value Of Stock, Bond, and Mutual Fund Portfolio
- Value Of Retirement Account(s)
- Value Personal Property & Personal Collections
SUM OF 1-5 = GROSS AMOUNT OF REAL ASSETS AT RISK (GRAR)
Step 2 – Calculate Net Amount Or Real Assets At Risk
Gross Amount of Real Assets At Risk (GRAR) – Outstanding Debt = NET AMOUNT OF REAL ASSETS AT RISK (NRAR)
Step 3 – Calculate Net Present Value Of Future Earnings
Take your current Annual Income & The Number Of Years Until Your Retirement, then calculate the NET Present Value
Step 4 – Calculate The Net Present Value At Risk Based Upon State Garnishment Laws
Example – in North Carolina 25% of your earnings are subject to Garnishment!
Net Present Value Of Future Earning X 25% (assuming North Carolina residency) = Net Future Earnings At Risk
Step 5 = Umbrella & Excess Liability Insurance Required
Net Amount Of Real Assets At Risk (NRAR) + Net Future Earnings At Risk = Total Umbrella Liability Limit Required
To give you an idea of how much umbrella insurance you need, take a look at the table below:
| Lifestyle | Additional Details | Assessment |
| You have a net worth of $1 million and drive a fast car. | Imagine yourself as someone who loves to hit the bars and clubs every weekend and drives around a $75,000 BMW B3. Your hobbies include extreme outdoor activities, such as skydiving, rock climbing, and snowboarding. Since you go out during weekends, having at least one drink before you get behind the steering wheel has become a norm to you. You’re a 36-year old adult who doesn’t want to settle down (yet) but owns a huge home. | Having this kind of lifestyle puts you at a higher risk than the average. The best umbrella insurance policy to get with this kind of lifestyle is one that offers at least $1 million of coverage. If you have a booming career or business, you can even get umbrella liability insurance with $2 million coverage. |
| You have a net worth of $3 million, have a 12-year old daughter, own a house, and drive a $12,000 SUV. | Because you have a daughter, you never go out to party with friends during weekends anymore. You’d rather stay at home and cuddle with your husband and watch some movies in the living room. You’re expecting your daughter to go to college in six years and spend $50,000 a year for her education. You have homeowners insurance with a $5,000 deductible and $500,000 in liability coverage. | With the given example, you’re an average risk person. Getting umbrella liability insurance with $2 million to $3 million coverage is ideal. |
| You have a net worth of $800,000, have three children, own an $8,000 Honda Accord, and are the only person working in the family. | Since your spouse isn’t working, you usually spend most of your day at the office and then immediately head home to spend time with the kids. You seldom go out and no longer drink alcohol because you had an auto accident seven years ago. You’re working like a madman because your entire family depends on you, and you have to prepare for your children’s education, especially when they head to college. | In the given example, you’re tagged as an average risk person who needs an umbrella liability insurance that provides at least $1 million coverage. As a side note, you should make sure you have Life Insurance to provide the best for your family.. |
| You have a net worth of over $1 million and have two teenage sons. | Your children are performing poorly at school, and you can no longer control them. Both of them do not qualify for any athletic scholarships, have a lot of angst against the world, and often hang out with the wrong types of people. As an attempt to get close (again) to your children, you allow them to drive. | You are responsible for your children’s behavior, and with the given example, you’re put at a huge risk. With these details, make sure to get an umbrella liability insurance that has at least $1 million in coverage. |
What Affects the Pricing of Umbrella Liability Insurance?
The price of umbrella liability insurance is hard to determine because there are different factors to consider. Catastrophic losses (losses that are larger than the usual) are challenging to examine in terms of dollar amount and frequency.
Listed below are the factors that influence the pricing of umbrella liability insurance:
- Attorney involvement claims
- Lawsuit financing
- Lawsuit investing
- Motor vehicle accidents
- Reinsurance
When getting umbrella insurance coverage, don’t forget to ask about these factors before signing any document.
Let your insurer explain how these factors affect the cost of your umbrella liability insurance and inquire if there are any means of keeping your costs low.
Having in-depth knowledge of how the above mentioned factors affect your umbrella liability insurance can help you lower your premiums.
Get Umbrella Insurance
Now that you know how crucial umbrella liability insurance is, talk to an ALLCHOICE Advisor right away.
Purchasing umbrella insurance will give you peace of mind knowing that you’re financially prepared regardless of the emergencies you might experience in the future.