So we may have advanced past Insurance 101 here with this topic. Actually, understanding what an "umbrella" is in the first place already puts you in the 200-level. Now that we know what it is (repeat: liability above and beyond the primary limits on the auto or home policy) we have to decide on a proper amount.
Not to complicate things, but at this point I have to say there is no one right amount. That's sort of cheating, but it's true in that nobody can pick the right amount for you for legal reasons, and everybody is different. Everybody has a different risk profile so there isn't any "one size fits all" limit.
We'll discuss the general rules of thumb after the jump.
There is one guideline I use when deciding what limit of umbrella to choose and it has been recommended by a number of private wealth managers with whom I work. I recommend a dollar for dollar asset protection until you hit $20m. That means if you add up all of your assets including your home, investments and salary (present and near future) you match that number with an umbrella. So if that figure is $5m, you buy a $5m umbrella. Generally that costs about $500 - $600 per year. Not a huge amount considering the potential coverage.
When you reach the $20m net worth level it no longer makes sense to go dollar for dollar. At this point you have a conversation with your agent and financial planners to figure out what sort of protection you need and what limit are you comfortable carrying. Umbrellas do two things very well. They protect your assets in the event of a lawsuit and they can act as a magnet for lawsuit settlements. A plaintiff's attorney will find out what your insurance limits are...and then ask for something in that neighborhood. There are dozens of cases every year after car accidents that result in multi-million dollar settlements
None of this is to say that having a high umbrella doesn't make sense, because it does, especially if you consider the alternatives.
If you have more questions on whether or not an umbrella is right for you, give me a call.
I was also confused about it but my agent helped in this concern. But I need to know more in this concern and found your post. It is very helpful as I now got this point and love to read more about it.
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