Every week in March, we’ll post on how much insurance you may need. While this question can challenge and confuse even the most financially savvy individuals, planning ahead is the best way to provide the peace of mind and support your family needs. It allows you to stay confident and powerful over your future, regardless of what life brings.

Today we’re focusing on personal property/casualty and liability insurance. This includes homeowners’ insurance, renters’ insurance, auto insurance, umbrella insurance and excess liability insurance. Most people purchase only the minimum required coverage and never think of it again. This exposes them to significant risk of loss from property damage, lawsuits, natural disasters, and the negligence of others.

Who needs it?

If you own a home, rent an apartment or condo, drive a car, own a business, or even have a pet dog, you need insurance.

Many types of insurance are required to be purchased. For example, you must purchase auto insurance to receive your driver’s license, and most lenders require homeowners’ insurance before providing a mortgage. The problem, however, is that the minimum limits might not provide the full coverage you need, especially as your net worth grows. This can leave significant gaps in your coverage. For example, many umbrella liability policies only begin once your loss exceeds a certain threshold, such as $500,000. If your homeowners’ or auto insurance only covers up to $250,000 or $300,000 of liability costs, you may be required to pay hundreds of thousands out of pocket.

While a loss can happen to anyone, certain factors (such as teenage children driving, renting out a property, or owning private jet) increase your risk. Certain occupations (such as doctor, lawyer, or accountant) are also more prone to costly errors. Other risk factors include being a board member, possessing highly valued jewelry or artwork, and owning a boat or other watercraft.

What options are available?

Even before discussing insurance, there are a few legal provisions available to protect part of your assets. The homestead exemption is a state-by-state protection of a primary residence against creditors. In California, this exemption is $75,000 for single and $100,000 for married individuals and $175,000 for individuals over age 65 or disabled [1].

Your IRA and 401(k) are also protected. While the Supreme Court has ruled that qualified retirement plans, such as 401(k)s, receive full bankruptcy protection [2], individual retirement accounts receive less ($1,283,025 in 2018) [3]. While most rollover IRAs receive the same protection as the original plan, keep in mind that the assets may be exposed to risk if comingled with individual IRA contributions or no longer traceable back to the original plan. Life insurance and annuities also receive certain protections that vary state by state.

In addition to the basic legal protections and primary insurance, most mid-to-high earners should purchase additional insurance. Umbrella liability insurance kicks in for large liability costs when your primary insurance (such as homeowners’ and auto) is exhausted. Valuable collections of jewelry or artwork are often limited by homeowners’ policies and may require separate coverage. Board members and directors of companies and non-profits expose themselves to significant liability risk and should consider directors and officers coverage if not offered through the board.

High-net-worth individuals may also consider additional ways to protect assets through spendthrift trusts, limited partnerships and LLCs, and other protective trusts.  An attorney specializing in asset protection can assist with these and other strategies. 

How much do I need?

There is no one-size-fits-all for liability insurance. Everyone has different assets and risks, and so must make the best decision for his or her family.

There are, however, rules of thumb. For homeowners’, you need enough to rebuild your home. The area you live makes a big difference in the types of additional insurance to consider (fire, flood, earthquake, mold, etc.). Large private collections of artwork, jewelry, firearms or other highly valued items require additional coverage to protect the full value, as these types of items are limited in most policies.

For liability insurance (such as your auto, homeowners’, and umbrella), higher net worth individuals need more coverage because they have more to protect. You may need to raise the limits on your auto and homeowners’ policies to coordinate with an umbrella policy. Consider also adding an endorsement for uninsured/underinsured motorist coverage. This will protect you against damages caused by other motorists either without insurance or without enough to cover your bills.

[1] https://www.nolo.com/legal-encyclopedia/the-california-homestead-exemption.html

[2] https://www.wealthmanagement.com/retirement-planning/creditor-protection-retirement-accounts

[3] https://www.financial-planning.com/news/retirement-assets-received-in-divorce-settlement-may-be-available-to-creditors