Remember driver’s ed? Sucked, right?
Everybody KNOWS it sucks. Even the people who put them on try to get gimmicky because GOODNESS KNOWS if they can help you pass the time as you sit through EYE STABBINGLY BORING content about who has right of way when a car is trying to turn left from a 4-lane road onto an intersecting 2-lane road with no traffic signal (duh, you wait for the biggest car to pull through first), they’ll have a leg up on the competition. Because you’ll pay WHATEVER for somebody to spice up the finer details of LANE CHANGING PROTOCOL, am I right!?
I’m right.
I know another subject that suffers from monotonaceousness. (It’s NOT “using God’s money that’s been entrusted to you to build an awesome outpost for your generations”. That subject ROCKS and/or ROLLS.) It’s INSURANCE.
Which is why so few of you are even reading this! Most of your compadres either wouldn’t click on the title, or I lost you about 2 articles back, when I first mentioned… you know… insurance. So good on ya son! Way to hang in, you hanger inner!
The pain of this (totally necessary, I’m sorry!) education is soon ending. I’m going to wrap up this (riveting… for some of us) series on insurance (for now) with something that you all need, most of you can afford pretty easily, and that very few of you currently have. Here it is! Umbrella insurance!
Wahoo! Let the good times roll! Like when you find out that THE HOT GIRL is going to be in your driver’s ed class! All right!
What is umbrella insurance? Think of it this way: have you ever been out in a storm and had the wind flip your umbrella inside out? What does one do with an umbrella that’s had its in flipped out?
You toss it in the trash.
Yep, that sad umbrella, a victim of circumstance, is like salt that has lost its saltiness, good only for the manure pile. But if you’d had umbrella insurance, Chris Paul would show up at your house and give you a new umbrella! So fun. Pick a new color! Mix it up.
While I’m sure, for the right price, you could purchase THAT kind of umbrella insurance, what I’m going to tell you about today isn’t for protecting your mobile rain shelter against unexpected loss. No, the stakes are too small, there. THIS umbrella is about excess liability coverage for you, wherever you go. I’ll elaborate:
You may not know it, but there are a lot of ways for you to get in trouble when it comes to legal and financial liability in our world today. Anything that happens involving you or the property that you own that could result in someone else suffering (real or perceived) loss, damages, offense… and that suffering could expose you to liability. Car wrecks, Amazon delivery people slipping on your steps, your ornery dog getting loose, etc. We are talking personal liability here, so this will NOT cover you when you screw up someone’s life in your business dealings (that’s a separate kind of insurance).
How does umbrella insurance work? If you look at your homeowners, or renter’s, or auto insurance policy, you’ll see a line that says “liability” with a dollar amount. That amount is how much your insurance company will pay if you cause damages (those could be property damages, but they could also be things like lost income, medical expenses and pain and suffering damages). That is your liability coverage and is always your first line of defense. An umbrella policy provides you with excess liability coverage because it covers you should you run into a situation leaving you liable for an amount greater than your primary relevant policy.
You get me? We talking about excess liability, y’all. Over and above. Excess.
So let’s say your neighbor has a prize Alpaca (we’ll call him Arsenio) and that slightly reduced llama (alpacas be bizarre, yo… and Arsenio is no exception), in his never ending quest for garbage to eat, escapes his placid mew BECAUSE ONE OF YOUR KIDS FORGOT TO RE-LATCH HIS PEN WHEN THEY WENT IN TO PET HIS SOFT HEAD and gets bumped by your vehicle into the back of a (moving!) garbage truck right as they’re squeezing down the voluminous waste. Arsenio is dead city now (he gave only the faintest whinny as he compacted, bless him) and your neighbor, whose livelihood came from Alpaca show winnings, sues you for emotional pain, lost wages and a replacement Alpaca. The judge, who in a terrible stroke of bad luck happened to be a Peruvian animal lover (and re-latching devotee), awards your dweeby neighbor a $750,000 judgement against you. DRAT and DOUBLE DRAT.
Well your $200,000 auto policy’s liability limit isn’t going to cover the damages, but if you spent a lousy hundred or so bucks this year, you’d have an UMBRELLA of protection that would cover excess liability. That means you get to NOT shell out $550k.
Get it? EXCESS coverage.
Because my wife is a physician, we’ve had an umbrella insurance policy for a long time. Even when we had very little money to our name, we knew that even a tiny car accident can cause suspicious but hard-to-refute neck injuries in the other driver when they discover that you’re a medical professional whom they assume to be loaded. (The discovery of someone else’s lucrative profession has a funny way of negatively affecting the spine, for some people.)
- Pro tip: an umbrella policy is an especially good idea for those who may be more likely to be sued – doctors, lawyers, landlords and llama farmers take note. –
- P.S.Pro tip: these things are so inexpensive that everyone should have one.
Avoiding the godforsaken courtroom is another benefit of these policies. Should you find yourself facing a lawsuit, whether it is frivolous or not, often the opposing party’s insurance company will see that you have an umbrella policy and just settle out of court with your insurance company for the amount of your policy (assuming you’re adequately covered). Lawyers are often pragmatists, and so the certainty of a $1M settlement is better than a trial and the possibility of a $2M award. But hey, maybe you enjoy some good litigation?! It often comes with time away from your money-earning vocation, a black hole of money toward litigators, and an emotionally crippled home for however long the proceedings last. (Avoiding that ALONE is worth some insurance money, so sez me.)
So how much of this magical umbrella coverage do you need? Well, even if you’re broke, you could use some coverage. But generally as you have a higher net worth, you need more coverage. You can also find additional coverage useful if you engage in activities or own property that can create liability headaches. Here’s some general rules of thumb (this is, of course, not Official Advice – your actual needs may vary):
Do you have negative net worth and limited assets? Well then a $1M policy should do you more than fine.
Do you have a bit of coin in your family coffers? Let’s make it $2M.
Have you followed the sage advice of multiple family leaders here at Abe’s Wallet and purchased some rental property for your family? Well then, cowboy, now we’re talking about a $3-5M policy. (There are a myriad of ways for your knuckleheaded tenants to hurt themselves that could result in rather dramatic lawsuits to you).
You get the idea. As your outpost expands, your umbrella policy should do. That’s the rule of thumb.
So HEAR ME, you trying-to-be-considerate-about-the-future Abrahams! Go ye forth and acquire a basic excess liability policy (you’re educated now; call it an umbrella policy. You’re down with the hip lingo). It’s a cheap way to further protect your family against trajectory-changing catastrophe.
And looky there! You made it! And it didn’t hurt THAT much. Okay part of it was uncomfortable.
But you did it. Just like that, you know more about insurance than the average yokel on the street. And you have the equivalent of that driver’s license that lets you drive with an over-21 adult in the passenger’s seat. Party time.
*Mark Parrett is one of the founders of Abraham’s Wallet. When not blogging for you here, he’s raising a family in Salt Lake City, UT and working as a financial planner at Outpost Advisors.
