Umbrella insurance metrics/calculator

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mass_biker
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Umbrella insurance metrics/calculator

Post by mass_biker » Wed Jan 15, 2014 11:25 pm

Next on the to-do list: umbrella insurance.

Is there a good metric on how much to get?

i.e. retirement assets + taxable assets + equity in home(primary and rental) + company stock and/or options x [some multiplier] = target umbrella coverage.

Not sure how other BHers think about this and would love some perspective.

Coverage seems pretty cheap...but how much is enough?

thanks

m_b

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BolderBoy
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Re: Umbrella insurance metrics/calculator

Post by BolderBoy » Wed Jan 15, 2014 11:40 pm

I use net worth + next tier up. If you NW = 1 mil, get 2 mil.

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Steelersfan
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Re: Umbrella insurance metrics/calculator

Post by Steelersfan » Thu Jan 16, 2014 7:53 am

Assets in retirement accounts are pretty well protected against liability suits.

But take your other assets and go higher if it makes you feel better.

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 8:06 am

BolderBoy wrote:I use net worth + next tier up. If you NW = 1 mil, get 2 mil.
Yes, that's as random as any other guideline I've seen. :)
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frugaltype
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Re: Umbrella insurance metrics/calculator

Post by frugaltype » Thu Jan 16, 2014 8:12 am

Steelersfan wrote:Assets in retirement accounts are pretty well protected against liability suits.
Can you say more about this? I see this said from time to time, but I don't know what specific types of accounts are protected and if it varies geographically. Thanks.

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 8:36 am

frugaltype wrote:
Steelersfan wrote:Assets in retirement accounts are pretty well protected against liability suits.
Can you say more about this? I see this said from time to time, but I don't know what specific types of accounts are protected and if it varies geographically. Thanks.
A 401K and 403B are protected under the ERISA act. My understanding is that this means they are protected from all creditors except ex-spouses, child support obligations, and the US Government. Rollover IRA's have some protection but it is more limited.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Umbrella insurance metrics/calculator

Post by Grt2bOutdoors » Thu Jan 16, 2014 8:53 am

Steelersfan wrote:Assets in retirement accounts are pretty well protected against liability suits.

But take your other assets and go higher if it makes you feel better.
That is partially accurate - ERISA funds such as a pension or 401k, Social Security are protected/shielded from acts of seizure related to liability lawsuits. IRA's are questionable - certain states such as NY/NJ/CT protect assets held within the account, however distributions may be subject to liens. You should research this.

What is subject to liquidation - cash, securities, your home equity (except I think in Texas - they can't touch the homestead), collectibles (think OJ Simpson), royalties, future wage income, everything else.

Add up all your current liability limits, deduct net worth from that figure - obtain umbrella coverage for the remainder of exposure and future wage income.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 8:56 am

Grt2bOutdoors wrote:
Steelersfan wrote:Assets in retirement accounts are pretty well protected against liability suits.

But take your other assets and go higher if it makes you feel better.


What is subject to liquidation - cash, securities, your home equity (except I think in Texas - they can't touch the homestead), collectibles (think OJ Simpson), royalties, future wage income, everything else.
Texas is not the only state that offers a homestead exemption.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 8:59 am

Grt2bOutdoors wrote: Add up all your current liability limits, deduct net worth from that figure - obtain umbrella coverage for the remainder of exposure and future wage income.
This is still really arbitrary. It implies that if you obtain umbrella equal to your vulnerable assets (plus future income) then nobody will touch those assets or income. The logic is not clear.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Drain
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Re: Umbrella insurance metrics/calculator

Post by Drain » Thu Jan 16, 2014 10:10 am

Call_Me_Op wrote:
Grt2bOutdoors wrote: Add up all your current liability limits, deduct net worth from that figure - obtain umbrella coverage for the remainder of exposure and future wage income.
This is still really arbitrary. It implies that if you obtain umbrella equal to your vulnerable assets (plus future income) then nobody will touch those assets or income. The logic is not clear.
Net worth, or total assets, or anything similar, is probably not a bad estimate of what a typical person would be sued for. Yes, there is always the possibility that the suit will be for more, but probably most will not. You can't protect against everything.

Seems to me that for a Boglemead, this approximation wouldn't work so well. Bogleheasds, as a group, are bound to have higher net worths relative to their apparent economic class than the typical person would, which means that using net worth (or similar) would tend to overstate the amount of liability coverage needed.
Darin

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 10:30 am

Drain wrote:
Call_Me_Op wrote:
Grt2bOutdoors wrote: Add up all your current liability limits, deduct net worth from that figure - obtain umbrella coverage for the remainder of exposure and future wage income.
This is still really arbitrary. It implies that if you obtain umbrella equal to your vulnerable assets (plus future income) then nobody will touch those assets or income. The logic is not clear.
Net worth, or total assets, or anything similar, is probably not a bad estimate of what a typical person would be sued for.
Can you provide a rationale for that statement? If I am worth 1 million and have an umbrella policy for 1 million, why will the plaintiff sue me for 1 million rather than 2 million?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Drain
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Re: Umbrella insurance metrics/calculator

Post by Drain » Thu Jan 16, 2014 11:04 am

Call_Me_Op wrote:
Drain wrote:
Call_Me_Op wrote:
Grt2bOutdoors wrote: Add up all your current liability limits, deduct net worth from that figure - obtain umbrella coverage for the remainder of exposure and future wage income.
This is still really arbitrary. It implies that if you obtain umbrella equal to your vulnerable assets (plus future income) then nobody will touch those assets or income. The logic is not clear.
Net worth, or total assets, or anything similar, is probably not a bad estimate of what a typical person would be sued for.
Can you provide a rationale for that statement? If I am worth 1 million and have an umbrella policy for 1 million, why will the plaintiff sue me for 1 million rather than 2 million?
No reason. Those amounts are pretty close to one another, and the plaintiff doesn't necessarily know your net worth to begin with.

Let's say you're going to sue someone who appears to earn somewhere in the neighborhood of $30K/year, drives a beaten-up car, and lives in a lower-class neighborhood. How likely are you to sue that person for $5M? There isn't anything stopping you from doing so, but you are unlikely to collect, and--I'm told--you are better off choosing a more realistic figure. If you don't accept that much, then you won't accept the rationale at all, so you can stop reading here. I can't defend this paragraph--it's just what I've been told.

Now let's say you're the $30K/year guy. Your net worth could be anything...but it is probably pretty low. Pick a number you like for the typical person fitting that description, and call it x. That number, x, is likely to be roughly what could be easily collected via lawsuit. Again, there are no hard rules here--it's just a likely number. So if I'm suing this person, and I need to choose a figure, I'm probably going to choose a figure somewhere in the ballpark of x--okay, perhaps more, but not a ton more. I'm not going to bother trying to sue the $30K/year guy for $5M.

It's that kind of reasoning that can justify using net worth as a rough guideline for how much liability coverage to have. Now, if the individual being sued has a net worth that's quite different from what's typical, then the strategy doesn't work as well. That's what leads to my concern about Bogleheads possibly over-insuring. They may have greater net worths than would normally be expected, given their other parameters, in which case they may be overestimating how much umbreall to buy. Then again, I suspect that many Bogleheads would be more comfortable slightly over-insuring anyway (since you never really know what number a plaintiff will choose), so perhaps it's a non-issue.

You have to choose some number, and the thinking is that, for most people, net worth gives a pretty good approximation of how much liability insurance they should have. There is no logical connection beyond that, and anyone whose net worth is substantially different than the norm for what would otherwise be their economic class might be advised to adjust accordingly or choose another approach.
Darin

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 11:19 am

Drain wrote:
Let's say you're going to sue someone who appears to earn somewhere in the neighborhood of $30K/year, drives a beaten-up car, and lives in a lower-class neighborhood. How likely are you to sue that person for $5M? There isn't anything stopping you from doing so, but you are unlikely to collect, and--I'm told--you are better off choosing a more realistic figure. If you don't accept that much, then you won't accept the rationale at all, so you can stop reading here. I can't defend this paragraph--it's just what I've been told.
I think it is unwise to think that the plaintiff will not know your net worth. It is routine for the plaintiff's attorney to request a statement of assets. It is very easy for them to ascertain both your net worth and insurance coverage information. It is not a guessing game.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Drain
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Re: Umbrella insurance metrics/calculator

Post by Drain » Thu Jan 16, 2014 11:28 am

Call_Me_Op wrote:I think it is unwise to think that the plaintiff will not know your net worth. It is routine for the plaintiff's attorney to request a statement of assets. It is very easy for them to ascertain both your net worth and insurance coverage information. It is not a guessing game.
Okay, then that strengthens my argument.

If you sue me, my net worth is (very) roughly as much as you're likely to be awarded. It doesn't have to be any sort of maximum, but it's a reasonable guess. So if you have any incentive to limit the amount you seek to something resembling the amount you're likely to get, it would make sense for you to choose a figure around my net worth.

Net worth is a starting point. And since there often isn't a whole lot else to go on when you're trying to decide how much liability coverage to buy, it can easily wind up as the end point, too.
Darin

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Re: Umbrella insurance metrics/calculator

Post by Drain » Thu Jan 16, 2014 11:37 am

By the way, it also makes sense that the greater your net worth, the more liability coverage you want, because you have more to lose. I doubt there is any particular reason to believe there should be a 1:1 relationship between dollars of net worth and dollars of liability coverage, but at least the one is increasing with the other, as it should. Since the decision of how much coverage to have is so rough and arbitrary to begin with...what the heck. You have to choose something.
Darin

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Re: Umbrella insurance metrics/calculator

Post by baw703916 » Thu Jan 16, 2014 11:52 am

The problem with this whole discussion is that it involves reading other people's motivations and predicting their behavior--something I tend to be very bad at. If they just sued you for net worth+insurance coverage, then the only thing a larger umbrella coverage gets you is a larger lawsuit. The answer of course is not to be sued--I think we are assuming that the insured is already doing everything reasonable to minimize the likelihood.
Most of my posts assume no behavioral errors.

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 11:52 am

Drain wrote:By the way, it also makes sense that the greater your net worth, the more liability coverage you want, because you have more to lose. I doubt there is any particular reason to believe there should be a 1:1 relationship between dollars of net worth and dollars of liability coverage, but at least the one is increasing with the other, as it should. Since the decision of how much coverage to have is so rough and arbitrary to begin with...what the heck. You have to choose something.
Our main disagreement is not in using net worth in the calculation, but your 1X factor. I think 2X is much safer - and not 2X net worth, but 2X exposed net worth. The goal is to give the plaintiff enough money to go away - given what they could possibly to get if they pursued your personal assets via along drawn-out trial. Built in to this recommendation is an assumption (which I believe is valid) that it is more difficult for the plaintiff to access your personal assets - compared to an insurance company's assets. I think this assumption is supported by historical data, if only anecdotal.
Last edited by Call_Me_Op on Thu Jan 16, 2014 11:56 am, edited 1 time in total.
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Re: Umbrella insurance metrics/calculator

Post by ResearchMed » Thu Jan 16, 2014 11:55 am

There is another "calculator" to use, but it's more "moral/ethical" (and *very* subjective) than asset-based.

We definitely "overinsure" if one looks at our umbrella policy (although the cost of this particular type of overinsurance is very low).

What if there is a catastrophic, life-altering accident?

-- A child ended up paralyzed for life, requiring full time care.
-- A head of household/breadwinner ended up paralyzed for life, requiring full time care AND leaving a family without the primary or only income?

We were almost IN one of those situations.
Had the car driver not eventually been found to have substantial insurance, we would not at that point in our lives been able to provide the round-the-clock private nursing, the special tutoring and classroom expenses... the level of care WE wanted, not what the state would have paid.

It took years to "settle", but because there WAS substantial insurance, the agencies (nurses), companies (ambulances), and hospitals agreed to wait for payment but provide services.

We were "lucky" (if one can call it that): It was NOT "for life".
But there was NOT enough "coverage" IF it had been "for life".

We never forgot that.

For a couple of hundred dollars extra per year, we know that if someone falls and lands on their head (or whatever hypothetical occurrence one thinks of), no person or family would be further destroyed financial, or go without necessary services or income.

They are ALREADY "DESTROYED" by the event that occurred, obviously.
One does NOT recover from that type of thing, not fully......

RM

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Drain
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Re: Umbrella insurance metrics/calculator

Post by Drain » Thu Jan 16, 2014 12:23 pm

Call_Me_Op wrote:Our main disagreement is not in using net worth in the calculation, but your 1X factor. I think 2X is much safer - and not 2X net worth, but 2X exposed net worth.
Actually, we don't disagree there at all. I don't know what the right ratio should be, and 2x sounds fine to me. It's kinda-sorta what I use as my own starting point (although in practice, I've wound up with a ratio larger than that). I was using "net worth" as a shorthand--note that I said net worth, or assets, or something similar. Plus, as an even rougher estimate than we're already talking about, 2x exposed net worth may wind up being about 1x net worth for many people. :)
Darin

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Re: Umbrella insurance metrics/calculator

Post by Drain » Thu Jan 16, 2014 12:26 pm

baw703916 wrote:The problem with this whole discussion is that it involves reading other people's motivations and predicting their behavior--something I tend to be very bad at.
And yet we have to do it. There is no alternative. So if we can find a rule of thumb that results in a reasonable compromise between cost and level of protection for the typical person....
Darin

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Re: Umbrella insurance metrics/calculator

Post by mass_biker » Thu Jan 16, 2014 12:28 pm

thanks all - I'm being quoted $800 for $3m of umbrella coverage - through LibMut (who does my auto + car) - and my understanding is that for every $1m on top of $2m the incremental cost goes down - sound high/low?

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Re: Umbrella insurance metrics/calculator

Post by letsgobobby » Thu Jan 16, 2014 12:42 pm

That sounds very high but I know it depends on specifics, including location. We pay $100 per $1M with Amica.

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 12:51 pm

mass_biker wrote:thanks all - I'm being quoted $800 for $3m of umbrella coverage - through LibMut (who does my auto + car) - and my understanding is that for every $1m on top of $2m the incremental cost goes down - sound high/low?
You live in Mass, which will make it higher than the national average to begin with.
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Re: Umbrella insurance metrics/calculator

Post by frugaltype » Thu Jan 16, 2014 1:06 pm

Call_Me_Op wrote:
mass_biker wrote:thanks all - I'm being quoted $800 for $3m of umbrella coverage - through LibMut (who does my auto + car) - and my understanding is that for every $1m on top of $2m the incremental cost goes down - sound high/low?
You live in Mass, which will make it higher than the national average to begin with.
I live in RI and pay roughly $500 for $5 mil from AMICA.

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Re: Umbrella insurance metrics/calculator

Post by Grt2bOutdoors » Thu Jan 16, 2014 1:21 pm

Call_Me_Op wrote:
mass_biker wrote:thanks all - I'm being quoted $800 for $3m of umbrella coverage - through LibMut (who does my auto + car) - and my understanding is that for every $1m on top of $2m the incremental cost goes down - sound high/low?
You live in Mass, which will make it higher than the national average to begin with.
I pay $250 for $1m of coverage.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 1:26 pm

frugaltype wrote:
Call_Me_Op wrote:
mass_biker wrote:thanks all - I'm being quoted $800 for $3m of umbrella coverage - through LibMut (who does my auto + car) - and my understanding is that for every $1m on top of $2m the incremental cost goes down - sound high/low?
You live in Mass, which will make it higher than the national average to begin with.
I live in RI and pay roughly $500 for $5 mil from AMICA.
Actually, it is a strong function of the population density in your city or town.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

Van
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Re: Umbrella insurance metrics/calculator

Post by Van » Thu Jan 16, 2014 1:47 pm

Let's say you are sued for $10 million dollars, and you only carry only $1 million in umbrella insurance. The insurer may look at the circumstances and decide not to aggressively defend against the suit. However, if you had a much bigger policy, the insurer might be much more inclined to aid in contesting the suit. Partly, for this reason, I carry a $5 million umbrella policy. Does this rationale make sense to others?

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Re: Umbrella insurance metrics/calculator

Post by Call_Me_Op » Thu Jan 16, 2014 6:06 pm

Van wrote:Let's say you are sued for $10 million dollars, and you only carry only $1 million in umbrella insurance. The insurer may look at the circumstances and decide not to aggressively defend against the suit. However, if you had a much bigger policy, the insurer might be much more inclined to aid in contesting the suit. Partly, for this reason, I carry a $5 million umbrella policy. Does this rationale make sense to others?
You could just as easily argue that having a larger policy gives your insurance company more incentive to try to weasel-out by claiming that the incident is not covered under the policy.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Umbrella insurance metrics/calculator

Post by Van » Thu Jan 16, 2014 7:55 pm

Call_Me_Op wrote:
Van wrote:Let's say you are sued for $10 million dollars, and you only carry only $1 million in umbrella insurance. The insurer may look at the circumstances and decide not to aggressively defend against the suit. However, if you had a much bigger policy, the insurer might be much more inclined to aid in contesting the suit. Partly, for this reason, I carry a $5 million umbrella policy. Does this rationale make sense to others?
You could just as easily argue that having a larger policy gives your insurance company more incentive to try to weasel-out by claiming that the incident is not covered under the policy.
Good point Call_Me_Op.

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Re: Umbrella insurance metrics/calculator

Post by brajalle » Fri Jan 17, 2014 3:15 am

The rule of thumb I've seen several places is - whatever you think you need in insurance coverage +$1million. As for us, I was fairly comfortable with our auto+homeowners, so I ended up with a $1million umbrella on top using this rule. It was fairly cheap to get. I'd highly recommend the book, Insurance for Dummies. It was a quick, informative, read that was chocked full of interesting & useful info.

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