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November 1, 2013

When do I need umbrella insurance?

At what level of net worth should someone consider umbrella insurance?

I think it’s something you should consider if you have a net worth of $500,000 or greater. But first you should be clear on what net worth really means.

Net worth is what you own minus what you owe. So the fact that you make a million dollars a year is not the determining factor in whether or not you’re a millionaire. The only people who use that definition are the financially uninformed and politicians who twist things around and throw out catch phrases designed to further their own agendas.

That being said, I would get umbrella insurance, which is extra liability insurance, when you reach the half-million mark in net worth. Prior to that I’d suggest carrying $500,000 worth of liability on your homeowner’s, car insurance and any other policies that have liability attached to them. Once you reach and cross that $500,000 threshold in net worth, however, I’d advise picking up another $1 million in liability insurance, called an umbrella policy, that attaches to the top of that and covers everything for an additional $1 million.

It’s a great buy. You can get it for about $200 a year in most states.

Should rental property debt be included in the debt snowball?

No, it should not. The debt snowball is Baby Step 2 in my plan, when you stop saving and pay off all debt except for your home — and I would include rental properties in there — from smallest to largest. Prior to this, you should start with Baby Step 1, which is saving up a starter emergency fund of $1,000.

As a reminder, Baby Step 3 is going back and fully funding your emergency fund with three to six months of expenses. Notice that I said expenses, not income. After that, Baby Step 4 is investing 15 percent of your household income in Roth IRAs and other pre-tax retirement plans, and Baby Step 5 means setting aside college money for the kids.

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