How Much Umbrella Coverage Do You Need?: the facts

1. An umbrella policy sits above the liability limits on the auto and home policies and pays a judgment those limits do not reach, plus the cost of defending the suit. It is sold in steps of a million, and the question is how many.
2. What a judgment can reach is the measure. It is net worth outside retirement accounts, since ERISA plans and, in Illinois, IRAs are largely protected from judgment creditors, plus a share of future earnings, since Illinois caps wage garnishment at 15 percent of gross wages.
3. Example: $1,500,000 of home equity, investments, and savings, $800,000 in retirement accounts left out, and $150,000 a year for 20 more years, of which 15 percent is reachable and worth about $305,782 today. The exposure is about $1,805,782, the auto and home policies cover $300,000, and the gap rounds up to a $2 million umbrella.
4. The future income is a present value: the reachable slice of each year's pay, discounted back to today, so a long career ahead adds more than a short one and a higher discount rate adds less.
5. The arithmetic sizes the coverage; it does not price it. The insurer decides what it will write and at what premium, and it will want the underlying limits raised to a floor before it writes anything.
6. What the arithmetic leaves out pushes the answer up, never down: teen drivers, a pool, a dog, a rental property, a boat, or a seat on a board each raise the chance of the suit, and an agent adds a million for them, not a formula.

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