Rethinking Umbrella Insurance – For High Earners and High Net Worth In…

Rethinking Umbrella Insurance – For High Earners and High Net Worth In…

Umbrella insurance is a hard sell for most people. Why? Because the concept of a extreme event that can be a game changer for your life and comfort is not something most people dwell on. Plus the concept is more recondite than say, covering a specific asset such as home and your car or boat.

Nevertheless, if you have assets worth protecting or substantial income, you must seriously consider buying a decent amount of umbrella coverage. Many people go around thinking it is a waste of money, others think like all things too good to be true, it is not going to be there if you really need it. in addition other believe that nothing extreme is ever going to happen to them.

In fact, a very smart and successful entrepreneur told me, “Listen, if I cannot already calculate my umbrella risk, how the heck can I insure against it?”

He is partly right. In all other situations of insurance you have a method to calculate your ultimate loss. Car damage, loss of life (yes you can monetize the risk of income by actuarial tables), home, personal articles… all can be quantified. And so it makes sense to insure against it.

But how do you quantify a catastrophe?

And in addition, I have seen people’s lives turned upside down by a extreme event. So here is how you insure for that kind of risk.

First, let us make something clear. An umbrella risk does not insure against such things like medical bills, unemployment, loss of life, tax liability or penalties or disability. It does cover you for the following types of liability:

  1. Personal injury
  2. Legal defense costs
  3. Auto related liability
  4. character damage
  5. Personal liability such as libel or slander charge

In other words, Umbrella insurance layers itself on top of your other specific risk insurance policies. So a dog bites someone while they are on your character and they sue, those damages are covered.

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

Most Umbrella policies have certain exclusions. Go over them very carefully. shared exclusions are: damage to your own character (covered by Homeowners insurance), self-inflicted and intended damage and damage arising out of certain exotic vehicles.

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

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