Personal Umbrella Insurance is additional liability insurance, designed to pay out when your existing auto and homeowner’s/renter’s insurance policies are exhausted. For example, you may only have $300,000 in liability coverage on your car insurance. If you are in a car accident and found liable for $1,000,000, you would be on the hook for $700,000 yourself unless you had an adequate umbrella insurance policy. Here is a diagram explaining this from MSN Money:

In addition, an umbrella policy can also fill in the gaps by providing coverage for other incidents like liability for rental properties or being sued for slander or libel. Imagine working and saving for decades, only to have all of it taken away with one incident.

Real-world examples of $300,000+ liability claims. Every time I read about one of these scenarios, I think of them as a reason to keep paying for my umbrella insurance policy.

Do you drive a car? In a sever car accident, medical costs alone can exceed $100,000 per person easily. Now imagine if there were 2, 4, or even 6 people in the car. Here is one example from a NY Times article on umbrella policies:

One of Mr. Cox’s clients crashed into the rear of a car on a slick highway. A woman and a child were critically injured. After two years of litigation, his client settled the lawsuit for more than $5 million. The client had $15 million in umbrella coverage. The policy paid for the settlement and all legal costs. “Without the umbrella,” Mr. Cox said, “they would have been completely wiped out.”

Are you ever a parent chaperone? A high school field trip led to a $700,000 verdict for negligence:

Lauren Crossan, of Randolph, N.J., had traveled to Hawaii in 2004 with Susanne Sadler, Sadler’s daughter, and another New Jersey cheerleader to perform in the halftime show of the Hula Bowl. Within hours of her arrival at the Hyatt Regency Maui Resort, Crossan was seen drinking alcohol. Her body was found the next day on the hotel grounds.

An arbitrator determined last month that Sadler was partially responsible for Crossan’s death and ordered her to pay $690,000 to Crossan’s parents and her estate.

Do you have a dog? This Reuters article discusses the increasing number of dog-related claims. Here are two examples that didn’t even involve a bite:

State Farm public affairs specialist Heather Paul’s dog ran out through her open gate and scared an elderly neighbor, who fell off the curb and broke her ankle. The lady filed an insurance claim with Paul’s carrier, but the standard liability coverage of $100,000 was not enough for her bone reconstruction. Luckily, Paul had an additional umbrella policy, which kicked in and covered the rest.

A California woman went through a two-year lawsuit after her dog got loose and knocked over a postal worker. The dog did not bite anyone, but the worker claimed damages greater than the homeowner’s policy covered. […] This owner said she had no umbrella policy, and now she cannot get one. Her homeowner’s premium has skyrocketed.

More scenarios:

• You leave a negative Yelp review about a company and the business sues you for defamation. Look what can happen with a mediocre 3-star Yelp review.
• A man was asked to cut down a tree from his own yard. He refused, and later a hurricane blew the tree down and injured someone in the neighboring house.
• Your child gets in a fight at school, and injures another student.
• You have a pool, and a visitor hurts themselves.
• A handyman or contractor hurts themselves on your property.

Have the insurance company lawyers be on your side. Forget even getting a large jury verdict against you. If someone simply sues you for a frivolous reason, you’ll have to pay for a lawyer to defend yourself. With an adequate umbrella policy, the money at risk will be the insurance companies instead of your own. That means the big corporate lawyers will be on your side, and your defense costs will be covered as part of the umbrella policy.

The premiums are relatively affordable. It cost us about $250 a year for $1 million in coverage for the both of us, including 2 cars and a house. That’s basically $10 per month per person. However, we did have to raise the liability limits of our auto and homeowner’s policies slightly to $500,000 each. So if you are only carrying the bare minimum required by law, your actual additional costs may be higher. If your net worth is higher, then you’d want to buy higher limits, but it should still be affordable on a relative basis.

It’s often easy to add to your existing policy. It was really simple to get as well; we had an umbrella policy added to our existing policies with just one phone call. We already had our homeowner’s and auto insurance at the same company. We didn’t have to fill out a long application or go through a credit check. If the cost is a shock, consider contacting an independent insurance broker and shopping around. You may find a better deal and get a multi-line discount.

But the low cost also means you may have to look out for your own interests. Something that involves a big commission like universal life insurance is more likely to generate interest from your insurance agent. On the other hand, selling you an umbrella policy results in a tiny commission. When I asked about it initially, all I got was a “yeah, I suppose that might be a good idea…” and they never followed-up. You need to take action on your own behalf.

One less thing to worry about. Peace of mind. Some people believe that you may be a bigger target for lawsuits if someone finds out you have a $1 million umbrella policy. Here’s how I look at it. If I really wanted to premeditate a lawsuit against someone, I’d pick someone who is worth a lot more than $1M. More like $10 million and up. In a big metro area like mine, multi-millionaires are a dime a dozen. Even if I was frivolously sued, again the whole point is that I’m still covered. To me, this argument is like saying you shouldn’t earn more money because someone will sue you for it.

Now, if you have a low or negative net worth, then perhaps there would be less incentive in getting such coverage. I certainly had no idea what umbrella insurance was in college. I would imagine lawyers are less likely to go after a big amount if you are “judgment-proof”. However, consider that your net worth may change quickly in the future, and if you did have an incident it may affect your future insurability.

Bottom line. Umbrella insurance gets to the core of the purpose of insurance. You pay money to share the risk with others and protect you and your family from a catastrophic event that could ruin your lives. In other words, you pay the premiums with the hope that you will never have to make a claim on it.

Here’s an infographic from HowMuch.net that charts how much your annual auto insurance premium will go up after just one claim:

Auto insurance companies portray themselves as friendly and forgiving in television commercials, but they are less friendly than you might think. After filing just one claim, car insurance premiums increase by an average of 41.81%, according to an annual study by insuranceQuotes and Quadrant Information Services.

I was somewhat surprised at how much the initial premiums and subsequent hikes varied state-by-state. On average, the annual premium is $842, but after a single $2,000+ accident claim, it goes up by $352. The source article also states that you should expect rates to remain high for three to five years, depending on the severity of the claim. Ouch.

I didn’t see similar data about smaller claims like a dented bumper. I keep my collision deductible at $1,000 because I’d rather self-insure below that amount, pocket the premium savings, and avoid any rate hikes if I did make a claim. In general, I always try to only pay for insurance when an incident would cause significant financial difficulty (your number may vary).

Nearly 30% of covered workers are now enrolled in a high-deductible health plan (HDHP). This means a lot more people are also eligible to contribute to a Health Savings Account (HSA). HSAs have the unique feature of triple-tax-free savings when used as designed:

• HSA contributions are tax-deductible,
• HSA investments can grow tax-deferred, and
• HSA withdrawals are also exempt from taxes if spent on qualified medical expenses.

(Penalties: Funds withdrawn for non-healthcare expenses are taxable. If withdrawn before age 65, there is an additional 20% penalty.)

HDHPs have lower premiums in exchange for higher deductibles and higher out-of-pocket maximums. As of 2017, in order to qualify for an HSA, an HDHP must have a deductible of at least $1,300 for individual coverage or $2,600 for family coverage. Many people will use their HSA balance to cover current health expenses. However, if you can manage to pay for your current expenses out-of-pocket while also contributing to the HSA, you have the opportunity to maximize the tax advantages by investing the funds into long-term vehicles like stocks. Here are the annual contribution limits:

You can then use the future balance to pay for Medicare premiums or other eligible healthcare costs in retirement.

We personally don’t have an HDHP/HSA option from our employers, so I don’t have much first-hand experience. However, Morningstar just released an HSA research whitepaper by Leo Acheson that examined 10 of the largest HSA plan providers:

• Alliant Credit Union
• Bank of America
• BenefitWallet
• HealthSavings Administrators
• HealthEquity
• HSA Bank
• Optum Bank
• SelectAccount
• The HSA Authority
• UMB Bank

In terms of using an HSA simply as a way to grab the upfront tax break on contributions, you really just want to find an HSA provider that offers a checking account without monthly maintenance fees. Earning 0.50% APY on a $2,000 balance will earn you $10 a year, but a $4 monthly fee will cost you $48 a year. The top plans listed by Morningstar for this short-term purpose were Alliant Credit Union, SelectAccount, and The HSA Authority.

In terms of using an HSA as a portable, long-term investment vehicle (think “Healthcare IRA”), the top plans listed by Morningstar were Bank of America, HealthEquity, Optum, and The HSA Authority. However, as a firm believer in the “Costs Matter Hypothesis”, I would personally narrow it down based on the lowest overall expense ratios (underlying fund + manager fee). Here’s a chart comparing costs for a $15,000 balance (click to enlarge):

The same cost chart but for a $50,000 balance:

The two cheapest plans recommended by Morningstar are HSA Authority and HealthEquity. You can see that overall HSA costs are still higher than what you can get in a IRA or better 401(k) plan. At least the selection is pretty good. See HSA Authority investment options and HealthyEquity investment options [pdf]. Below is a sampling from the HealthEquity menu.

Keep in mind, this is not my list but what Morningstar recommends. One option not listed here is Saturna, which may make sense if you only plan on making a single lump-sum max contribution each year and buy an all-in-one Vanguard mutual fund with one transaction per year.

Please feel free to share your own experiences in the comments below.

After my initial post about Lemonade insurance, there was a discussion in the comments about how Lemonade’s business model compares with existing mutual insurance companies. Lemonade reached out to me and wanted to clarify some things, and I suggested that they write a guest post about the topic. Lemonade agreed and below is their response:

A Deeper Dive Into the Lemonade Business Model

Not all insurance companies work the same way. Beyond the technology and AI, behind its slick app and website, Lemonade’s different because its business model is different.

As opposed to traditional insurers, Lemonade takes a fixed 20% fee out of your monthly payments, pays reinsurance and other unavoidable expenses, and uses the rest for paying claims. If there’s money leftover, Lemonade returns it in the annual Giveback. Giveback is a unique feature of Lemonade, where each year leftover money is donated to causes our policyholders care about. Policyholders who care about the same causes are virtual groups of ‘peers.’ Lemonade uses the premiums collected from each peer group to pay the group’s claims, giving back any leftover money to their common cause. And, if the group’s claims exceed what’s left in the pool, reinsurance covers it! (Reinsurance = insurance for insurance companies!)

That changes everything.

Insurers typically make money by investing your premiums (“float”) and by paying out less in claims and expenses than they took in premiums (“underwriting profit”).

Lemonade relies on neither. We collect premiums monthly, so the money earns interest in your bank account, not ours, and we return unclaimed money to the causes customers care about at year’s end.

So what does Lemonade do with the remaining 80%?

In a nutshell: pays claims.

Lemonade spends approximately 20% buying ‘reinsurance’ from folks such as Lloyd’s of London, to ensure there will be enough money for claims even in ‘bad’ years. This kind of reinsurance buys peace of mind, but it is costly.

So our data scientists have modeled an optimal mix of internal and external ‘reinsurance’, and set aside another ~20% as the ‘Lemonade Reinsurance’. Think of it as a ‘rainy day fund.’ The costs of reinsurance fluctuate over time, and there are other smaller expenses (transactional fees, premium taxes and others) that are also paid out from this combined 40%.

The final 40% goes towards the Giveback to the cause selected each year, if none of the people who selected that cause make a claim.

Most years, there will be some claims, so the amount available for Giveback will average less than 40%. But our number crunchers tell us there should be a nice amount left for most causes most years.

What about the ‘bad’ years? Fear not. That’s what the reinsurance is for, and Lemonade Reinsurance as well as the reinsurance partners have set aside funds for exactly such a situation.

In short, job #1 is to make sure your claim is paid, job #2 is to Giveback what’s left.

Wait, so how is that different from mutual insurance, you may ask?

Lemonade is the oldest new idea in insurance. And whether you view its tech and user experience as being radically new, or its business model as centuries-old infrastructure, Lemonade is using technology to reconstitute a business model which was once prevalent.

Look at Uber or AirBnB: Neither have created spanking new markets. It’s their technology packaged with a sharing economy-esque business model that is novel. Similarly, there’s nothing new about renters and homeowners insurance, but the technology, together with the behavioral economics and unique business model, differentiate Lemonade from the rest. Lemonade writes policies on your phone in seconds, pays claims in minutes, gives back money to nonprofits, all using AI and other tech that incumbents have not used.

The mutual companies started with the notion that pooling people into meaningful communities, instead of meaningless masses, is better for consumers. But the mutuals of today have wandered off into a different direction from that sense of community that started hundreds of years ago.

What made mutuals stray this way? Well, if you take any community and you enlarge it with millions of anonymous people, the social bonds between the people break down. Insurance companies have tried to cope with the challenge of pursuing growth, but it came at the expense of group affinity.

Yet with technology, you don’t have to trade off affinity for growth. Specifically, affinity in Lemonade has spurred growth, and has not been an obstacle of growth. Think of Lemonade as having thousands of mutuals under one company, rather than being one giant mutual.

Lemonade is a Public Benefit Corporation, a certified B-Corp and our team genuinely wants to do the right thing. Lemonade takes a flat 20% fee so as to never be in conflict with our customers, and never make money by denying claims. By placing ‘unclaimed money’ beyond reach, we removed temptation, and changed the game.

That’s a first for insurance.

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Get a free online quote from Lemonade and compare with what you have now if you live in California, New York, and Illinois.

While doing the research for my auto premium comparison post, I noticed that several of the state websites promoted an app called WreckCheck. Created by the National Association of Insurance Commissioners (NAIC), this free mobile app for iPhone and Android is one of those things you should download onto your phone now to hide away in some folder and hopefully never use.

More than simply a checklist, the app will guide you through the steps you should take following an accident. Ideally, it will keep you calm and collected in a time of stress. The app tells you what to do, and also what not to do. As a backup, you can also print out the checklist in PDF form.

Things you should do:

• Keep your vehicle information handy ahead of time (glovebox or in-app) including VIN, license plate number, insurance company, agent name, and policy number.
• Document the time and location of accident (uses your GPS).
• Take pictures of the accident, including damage to all vehicles involved (uses your camera).
• Document what happened, including vehicles and people involved (uses your audio recorder).
• Call the police (tap to call 911). If they are not dispatched, file an incident report.
• Share only your insurance card information, including name and insurance phone number. You are not even required to share your personal phone number.

Things you should NOT do:

• Share your home address or drivers license number.
• Allow someone to take or photocopy your ID.
• Admit fault.

The app can email a completed accident report directly to you and/or your insurance agent. Finally, the app provides tips on how to file and follow up on a claim. Here are some app screenshots and a explanatory video: