Do Millennials Need Umbrella Insurance?

My Millennial money tips this month focus on whether Millennials need umbrella insurance, saving for a big trip, and max 401(k) contributions

It’s already a slog for many Millennials to get the right insurance coverage. You may have disability and life insurance. But probably not enough, and only through work. And now umbrella insurance? What’s that? And how will I know whether I need umbrella insurance?

*Editor’s Note: I originally published this article in my Millennial finance newsletter. You can gain access to the newsletter twice each month (for free) by adding your name here*

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What Is Umbrella Insurance?

Think of umbrella insurance like an extra layer of clothing in case of bad weather.

Dr. James Dahle describes umbrella insurance as “a type of insurance that goes above the limits and coverages of any of your other insurance policies.”

He explains, “If you have a claim against your car insurance or your homeowner’s insurance, that policy will only cover you up to a certain amount. If you don’t have an umbrella insurance policy, then you will have to pay for any extra amount that you owe.”

When Millennials Need Umbrella Insurance: Four Examples

Umbrella insurance comes into play when you surpass the limits of your existing insurance policies. So we’re typically talking about claims above $300,000-$500,000.

And at these high dollar amounts, you want to try to avoid exposing your own assets and net worth.

In recent Wall Street Journal coverage, Veronica Dagher wrote that umbrella insurance “protects your assets from lawsuits related to events such as someone slipping on your icy driveway, a neighbor’s child injured on your backyard trampoline, claims of defamation after an online post, and — most commonly — from serious car accidents.”

According to one study, the U.S. is the 5th-most litigious country in the world. Umbrella insurance can protect your finances if a court finds you at fault, however unintentional.

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Price Increases Just As Millennials Need Umbrella Insurance

A variety of pricing dynamics have changed umbrella insurance coverage in recent years.

Here’s Veronica Dagher’s WSJ report:

“The cost of umbrella insurance was hit hard by rising prices for repairs and medical bills and bigger legal settlements. And, while car and home insurance premiums also surged, one thing that didn’t change is the coverage limits on most people’s policies.

A driver, for example, who had a serious collision with another vehicle three years ago that might have faced a $240,000 claim, within the $250,000 liability limit of many policies. If that same accident were to take place today, chances are the claim would be higher than $250,000 and trigger the driver’s umbrella policy — assuming they had one….”

What might this mean for your umbrella insurance needs?

• Higher monthly or annual premiums
• Lower coverage limits
• Less frequent approval for the coverage limits you desire

“The average annual premium for umbrella policies in the U.S. rose by about 7% to $328 in 2022 from 2019,” Dagher reported.

Even with such increases, though, umbrella insurance remains valuable. You typically receive a lot of insurance coverage for a relatively small expense.

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The Steps to Take When You Need Umbrella Insurance

Try to avoid locking in umbrella insurance coverage immediately. First, compare a few quotes from different insurance providers.

You’ll want to start with your home or auto insurance providers. You may get a discount for bundling your umbrella insurance with one of your existing policies. And you also may learn that you must hold home or auto insurance with a company to qualify for their umbrella insurance.

Once you confirm this information, you may need to increase the liability coverage on your home or auto policies. For example, if umbrella insurance coverage kicks in at $300,000, the personal liability on your home insurance can’t stop at $100,000. You’ll need to increase your personal liability to that $300,000 threshold.

Umbrella Insurance: In Conclusion

Umbrella insurance may feel like yet another task on your financial to-do list. And for something that you may never use!

But umbrella insurance helps to prevent a worst-case financial scenario from unfolding in your life. And as Dr. Dahle writes, you often can get $2 million-$3 million of coverage for only $250-$500 per year.

That’s a small price to pay for financial security and peace of mind.

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The Millennial Finance Newsletter: August 26, 2024

For your days ahead: 3 perspectives, 2 articles, and 1 idea from me.

​Three Perspectives

1 / How much money you need to save before retirement: less than you think?

2 / Why you may not want to max out your 401(k).

3 / How to — gradually, intentionally — save for a big trip.

​Two Articles

1 / Giving name to a feeling of “nagging insecurity about personal finances” (read to the end for my contribution!)

2 / Please be careful about which “banks” you deposit your money at.

One Idea From Me

My oldest son loves the music from the Broadway show “SIX.” The songs are certainly catchy, but he also seems to enjoy learning the English history on which the play is based. One of his favorite songs revolves around how one of King Henry VIII’s wives responded to disappointment and frustration. I wrote about this dynamic in the context of our investments:

1 / “When you tax-loss harvest, you embrace the loss. You sell your investment at a low point, locking in the outcome. You then replace your investment with a similar, but not “substantially identical,” one.

It’s not ideal. You’d prefer to see your investments grow. Your managing your response in a productive way, though.

When you do that, the IRS allows you to deduct that “lost” amount from your ordinary income taxes. The loss can offset up to $3,000 in income each year.

And you then can “carry forward” any unused losses indefinitely.”

You can read more in When Your Investments Let You Down.

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Your Questions About Whether Millennials Need Umbrella Insurance

I hope these articles help! Please feel free to send me an e-mail at kevin@illumintfc.com with any follow-up questions. You also can subscribe to my newsletter here to learn more about how you can turn your money into memories with your family. I typically send the newsletter twice each month.

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Recommended Money Reads for Millennials

If you liked this article, you may also want to check out:

• The Overlooked Reason to Prepare for an Inheritance
• What’s the Right Savings Rate for Millennials?

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About Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to free personal finance tips written specifically for Millennial parents. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your kids. And then when you’re ready, please send me your thoughts & questions!