One of the most underrated ways that an individual can protect himself is by purchasing umbrella insurance. It is possibly the biggest no-brainer kind of insurance you can buy, simply because it allows you to avoid wipeout risk in exchange for a very modest sum.
For those of you unfamiliar, umbrella insurance is an insurance policy in excess of home insurance, auto insurance, boat insurance, etc., and it guards against freak accidents that would drive you into bankruptcy.
For instance, let’s say you’re on your honeymoon in Switzerland, and you crash your rental car into the CEO of Nestle, putting him on permanent disability. That would cost you millions of dollars. Most likely, that’s game over. You’re gonna lose your house, you’re gonna lose your assets, and you will be paying out a percentage of your assets to the Nestle man for the rest of your life. It’s not a pretty picture.
A more likely scenario in which you would want an umbrella policy is if you want to guard yourself against a hypothetical lawsuit that would go beyond your current coverage. Let’s say you have a $500,000 homeowner’s insurance policy. Your son has a friend over to the house, and the little tyke bangs his head on the diving board in your backyard pool. His family takes you to court and wins $900,000.
If you only had homeowner’s insurance, you would be on the hook for that additional four hundred thousand dollars. But if you had an umbrella policy (coverage of which comes in million dollar increments), you would be insured for the $500,000 of the homeowner’s policy plus $1,000,000 for the umbrella coverage, meaning that our hypothetical diving board accident could lose you $1,500,000 in court before it costs a penny out of your pocket.
The nice thing about an umbrella policy is that it is dirt cheap, relatively speaking. Usually, it costs about $300 per year for each $1,000,000 increment of insurance that you buy, and it can bring you great piece of mind. If you have a guest come over that falls down the stairs and paralyzes himself, it is quite possible that the total costs of the litigation will cost you more than what a $500,000 policy would cover. But if you spent $600 per year to get $2,000,000 worth of umbrella insurance coverage, you would need to lose $2,500,000 before getting affected personally.
When it comes to umbrella insurance, we’re in Benjamin Franklin’s “an ounce of prevention is worth a pound of cure” territory. Conceptually, you can buy yourself great piece of mind for $600 by adding $2,000,000 worth of coverage to any adverse event that comes your way. You do not remember the day that the milkman fell down the steps of your porch as the day that put you on the path to bankruptcy.
The type of person who absolutely needs umbrella insurance is the type of person who is making big bucks, and everyone else knows it. If you have hundreds of thousands of dollars in investable assets, a cushy job as a professional in a high-paying field, a nice house, a vacation home, and other people are aware of these things, you’ve got a bullseye on your back. All it takes is one person in your life that is more unscrupulous than you initially thought to try and shake a couple million bucks out of you in “an accident” that involves your home, car, boat, vacation house, etc. For $900 each year, you’d buy yourself $3,000,000 in coverage against a gold-digger trying to bring you down. If you got assets worth protecting, an umbrella insurance policy should be etched in the ten commandments of your wealth-building strategy. For an extremely modest sum of money relative to your assets, it’s the most straightforward way to buy yourself piece of mind.