It’s finally looking like Spring in Minnesota, although we haven’t had any rain yet. Folks on a journey to FIRE know to set aside money for a rainy day, but the great majority of people do not carry a big enough umbrella insurance. That is, an umbrella policy that pays for liability judgements above the limits of your existing auto & home insurance policies.
Umbrella policies protect you from a number of catastrophic risks. Everything from someone slipping on your sidewalk, a party guest drunk driving and killing someone, a child drowning in your pool, or a terrible car accident. People that hire a contractor, home assistant, after-school nanny, or house cleaner have a heightened risk of an expensive judgement.
We updated our umbrella policy at the end of last year, when I realized that we weren’t carrying nearly enough. Money Magazine shared a rule of thumb that one should carry an umbrella policy equal to 1x to 2x your net worth. We were only carrying a fraction of that amount, but chose to increase it to a level that equalled our net worth (including the value of our house and pensions, which are protected from liability judgements in many states). Our new coverage equates to roughly 1.5x our ‘exposed’ net worth.
It’s not terribly expensive coverage – a typical homeowner with two cars can buy $1 million in umbrella coverage for about $250 a year. There are also some requirements on the base coverage your auto and home coverages need to be set at, but we were already good on those.
You don’t have to get too far in your FIRE journey before your assets become significant. The average liability claim exceeds $300K. Make sure you are doing enough to protect your nest egg against a major financial claim as a foundational consideration of your early retirement plan.
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