Small Price To Secure FIRE: Umbrella Insurance

The two biggest risks to F.I.R.E. (Financial Independence Retired Early) probably comes down to large unexpected medical expenses and litigation risks. If you own rental properties, the risks may be higher.

However, I couldn’t find much data on how much the risk factor rises for those who own rental properties. Gray area like this bothers me.

Simple math would suggest, the more housing you provide, the more people living on your properties, which equals more risk. An 18-unit apartment averaging 2 bedrooms per unit would equate to about 36 to 54 tenants living on the property. You could assume your chances of being sued has gotten 36 to 54 times larger. I wish there were more specific data on umbrella claims. If anyone knows a link with more data on umbrella claims please do share on the comment section below.

So, I decided to purchase umbrella insurance to plug the risk and sleep a little better at night. Trust me. Once you go FIRE, the thought of being sent back into the rat race is the last thing you want happening.

Let me share with you guys what I learned.

 

 

What is Umbrella Insurance?

It’s an additional liability insurance of 1 million or more in coverage which is added on top of your current auto and property liability coverage.

Umbrella insurance is unique in some sense because it also covers situations like slander or libel lawsuits other policies may not cover.

 

What does it cover?

• Costs of legal defense
• Injuries caused to others at your fault
• Damages you caused to people’s properties
• Damages caused by your tenants if you are a landlord
• Slander lawsuits (An injurious spoken statement)
• Libel lawsuits (An injurious written statement)
• Defamation lawsuits
• Protects you from potential wage garnishment
• Shock/Mental anguish
• Injuries caused by pets
• False arrest, detention, or imprisonment
• Malicious prosecution

Here are some scenarios of what the insurance covers.

A pedestrian walking by your property trips on a sprinkler head and injures his back. He decides to sue you for $500,000.

You hit a pedestrian backing out of your driveway. You become responsible for a million dollars in medical bills.

A friend borrows your car and gets into an accident. Injuries to the other driver results to a 1.2 million in medical expenses.

You decide to allow your friend to take over the wheels during a long trip. Your friend gets into an accident resulting to the other driver being hospitalized for 1 month. Hospital bills result to 1 million dollars.

You post something on your social media account about someone. They sue you claiming that the post has caused damage to their reputation suing you for $600,000 in libel.

You accidentally spill your hot coffee onto a child in a busy coffee shop. Medical expenses to treat the burn results to a $500,000 medical bill.

An auto accident results to a claim from the other driver for a long-term back pain suing you for $800,000.

A tenant claims injury on your property and sues you for $500,000.

 

Who’s Covered by The Policy?

• You and your spouse
• Any relative or dependent living with you
• A friend or relative who borrows your car.

 

How Does the Coverage Kick In?

You get into an accident which leads to a liability claim of $500,000. Your auto insurance liability of $300,000 covers the first part of the bill while the umbrella steps in and covers the remaining $200,000.

 

 

What is Retained Limit?

Umbrella insurance come with something like auto insurance deductibles known as retained limit. In my case, my umbrella insurance came with a $500 retained limit. What that means is anything above that amount will be paid for by the insurance. From my research, it’s not uncommon to have policies with $5,000 or even $10,000 retained limits/deductibles.

 

Why is Umbrella Insurance So Cheap?

Probably because it’s highly likely you will never have a claim over the limit of your current liability coverage from your policies. The average bodily injury claims from 2010 to 2013 looks something like this.

2010 – $14,406

2011 – $14,848

2012 – $14,690

2013 – $15,443

Can’t find the data on the more recent years but it’s easy to see what the average would look like projected to the current year.

It’s estimated that a claim that exceeds the typical policy limit may be as low as .001% chance. However, that is for auto insurance claims only.  Again, a grey area when it comes to landlords. 🤔

 

How Much Did It Cost Me?

Geico provided the best quote in my case. They offered $1,000,000 in liability coverage for one year at $234. That’s about $19.50 per month to cover everything!

Geico has some requirements before qualifying for their umbrella insurance. The following requirements are:

Auto Insurance Policy

• $300,000 person/$300,000 occurrence (bodily injury), $100,000 (property damage)
• or $250,000 person/$500,000 occurrence (bodily injury), $100,000 (property damage)

Homeowners Insurance Policy

• $300,000 liability

Boat Insurance Policy (if applicable)

• Boats under 26 feet & under 50 hp: $100,000 liability
• Boats 26 feet or longer, or 50 hp and up: $300,000 liability

So, in my case…

 

 

My renewal premium for $100,000/$300,000 came out to be $561.40 for 6 months ($93.56/month). Which was great! No complaints! However, the funny thing was…

 

 

After adding the umbrella insurance and raising my liability coverage to meet requirement, my premium dropped to $518.40 ($86.40/month).

What happened? Adding the umbrella qualified me for the Professional Group Insurance Plan. Geico states the discount saved me about $128.60.

Always get a quote from your current insurer to see if it may qualify you for additional discounts. 👍

 

 

Conclusion

It’s likely I will never have a claim over my auto and property liability amount in my lifetime. However, life happens. Crazy things happen to people sometimes. The umbrella insurance becomes more compelling for those who have more active lifestyles owning motorcycles, boats, RV’s, golf carts, etc.

The main purpose for getting umbrella for me was simply to sleep better at night. The experience with dealing with tenants over the years has really opened my eyes when it comes to the type of potential litigation risks. They will call you about all kinds of issues. My most recent one was regarding wasps in the back yard attacking them.

I may have not purchased umbrella insurance if I was never exposed to dealing with tenants. In some way, I’m glad I managed my own properties to learn about the type of risks that come with owning rentals.

Paying $19.50 per month is a small price to pay to sleep better at night, secure F.I.R.E. and protect your assets in my opinion.

One of my goal for 2019 was to get umbrella insurance. The plan was to have my dividends cover the costs. Luckily, the dividend portfolio has been doing better than expected and can easily carry the small cost for the umbrella.

Would you guys purchase umbrella insurance if you were retired early? Perhaps, even if you were not retired? Curious to hear some thoughts. Thanks for reading.