Cut to the chase: with liability insurance, you should carry as much as you can. Most individuals and families carry liability insurance from two main sources: their home and auto insurance policies. But this may not be enough to fully protect your assets in case of an accident or a lawsuit.

That’s where “umbrella” insurance comes in, to cover you above the liability limits of your home and auto policies. Also known as a Personal Liability Umbrella Policy (or “PLUP”), it will provide extra protection of $1 million or more, and yet these policies are relatively inexpensive ($100-200 per year) because of the low likelihood of being tapped.

However, you must understand how these three policies work together to make sure that you don’t have a potentially expensive gap in coverage.

How does car insurance work? 

Liability Coverage

Auto liability coverage amounts are defined in three numbers: per person bodily injury, per accident bodily injury, and property damage (often expressed in abbreviated succession, such as “$100k/$200k/$100k”).

Every state has a minimum coverage amount, but they are so woefully inadequate that it’s scary. Florida only requires $10k/$20k/$10k, and lest you think it’s just a red state thing, California is not much better at $15k/$30k/$5k. 

I just met with a new client who had insurance coverage just above his state’s minimum requirements but had a net worth of well over $2 million, placing a significant amount of their nest egg at risk if they’re in a bad accident. They may even have to declare bankruptcy to protect against an injured party taking it all.

So, please, check your policy! Can you afford to total someone else’s new Mercedes, or worse, be the cause of (and pay for) someone’s serious injury or life-long disability?

Uninsured (or Underinsured) Motorist Insurance

Most people carry (and some states require) “Uninsured or Underinsured Motorist Insurance.” It follows the same three basic liability categories but instead, it pays you, if you, your family members, or any occupants of your vehicle are injured by someone else that doesn't have insurance or doesn’t have enough.

Generally, you may carry up to the same amount of uninsured motorist coverage as your own personal liability coverage. I highly recommend this so that you are not relying on the other party having good insurance if you’re injured and they’re at fault. (Remember the scary low legally required insurance amounts!)

Medical Coverage and PIP

 Most policies also have a small amount of coverage for medical payments or personal injury protection (PIP) that will reimburse your medical expenses and lost wages if you or someone in your vehicle is injured (but this coverage is generally small, like $10k).  This pays for your injuries, regardless of fault, before your health insurance kicks in.

Collision & Comprehensive

Collision and comprehensive coverages are always optional and cover the cost of repairing or replacing your vehicle after a crash or other incident, whether you’re at fault or not. For most people, depending on the types of cars they drive, collision coverage is the most expensive portion of their bill. Most accidents don’t result in serious injuries to people, but almost all will end up with a big bill from the auto body shop if not a total loss of the vehicle. 

How much car insurance should I get?

Skimping on liability insurance is not the place to “save money.” Furthermore, every umbrella policy will have a minimum coverage amount that you must carry before the policy kicks in. The most common requirement is $300k/$500k/$300k, which is where most auto policies top out, but make sure you always read the language in your umbrella policy. If you carry less than the required minimum amount, you will need to pay the difference out of pocket before the umbrella policy kicks in, or your policy could pay less than the full coverage amount. Check your policy to be sure that there’s no gap. 

If you need to save money on your auto policy, consider increasing your deductible on the comprehensive and collision portion (or dropping collision altogether if you have an older vehicle, and have enough liquidity to replace it if needed). Sure you could be out a couple thousand for your deductible after an accident, but that won’t derail your financial plan like a lawsuit could. The main point of insurance is to cover the things that you cannot afford to have happen!

How much liability insurance do I need? 

Homeowners/Renters Personal Liability Coverage

Unless you’re in a vehicle, your homeowners or renters policy is your main source of liability protection. Most people are surprised to learn that their homeowner's policy protects you and your family when you’re not at home too! For example, your child accidentally causes damage to an expensive work of art in a hotel lobby, or your dog accidentally knocks over an old lady at the park and she breaks her hip. The insurance company will also cover legal expenses and handle the management of any litigation and settlement negotiations.

Here again, you will need to carry the minimum liability coverage required by your umbrella policy, which is generally $500k. It shouldn’t add too much to your premiums (unless you have certain breeds of dog), and you can always increase your deductible to save costs. Again, insurance is for things you cannot afford, not the “little stuff.”

Umbrella Insurance

The general rule of thumb is to carry at least $1 million of excess liability coverage, no matter your net worth. These policies are inexpensive: on the order of $100-200 per year.  If your net worth is more than $1 million, make sure that the total liability coverage (home & auto + umbrella) is at least as much as your net worth (We’ve all heard the expression, “I’ll sue you for every penny you’ve got!” It happens). 

For example, if you have a net worth of $2.3 million and a $300/$500/$300 auto policy, you should have a $2 million umbrella policy. Umbrella policies are available in increments of $1 million of coverage. 

I have an umbrella policy, am I protected now?

Carrying an umbrella policy does not mean that you cannot be sued for more, but most of the time, the injured party will just go after the big shiny insurance policy.

There are also situations where an umbrella policy will not cover you, namely: causing intentional harm, damage caused in the commission of a crime, and property damage or injuries caused while operating a business (even if the business is done from your home, get a business liability policy!). 

The bottom line:

With liability insurance, you should carry as much as you can. Fortunately, you are unlikely to have a claim, so the cost of the premiums is very affordable (unlike the potential cost of not having enough liability coverage).