Rethinking Umbrella Insurance – For High Earners and High Net Worth Individuals


Umbrella insurance is a hard sell for most people. Why? Because the concept of a catastrophic event that can be a game changer for your life and comfort is not something most people dwell on. Plus the concept is more abstract 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. Yet other believe that nothing catastrophic is ever going to happen to them.

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

He is partly right. In all other cases of insurance you have a method to calculate your ultimate loss. Car damage, loss of life (yes you can monetize the risk of income through 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 yet, I have seen people’s lives turned upside down by a catastrophic event. So here is how you insure for that type 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. Property 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 property and they sue, those damages are covered.

So how to assess 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. Common exclusions are: damage to your own property (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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