An umbrella insurance policy, sometimes known as excess liability, is additional personal liability coverage that supplements auto and homeowner insurance liability coverage to protect you from a wide variety of risks. Wealthy individuals with substantial assets to protect have been the primary audience for an umbrella insurance policy. But anyone with assets and a decent income can benefit from the extra coverage.
To illustrate how an umbrella policy works, let’s say on your homeowner’s policy you have a $500,000 liability limit. If you purchase an umbrella policy for $1M dollars of additional coverage, the liability on your home goes from $500,000 to $1.5M. And it’s the same scenario for your auto policy if you use an umbrella.
So, the purpose of the umbrella policy is to protect your assets if you get sued. This is especially important because we live in a litigious society, so this extra coverage is crucial to have. Let’s say you’re driving down the street, the sun gets in your eyes, and you hit someone. That person is seriously injured. In this scenario, you’ll want to have the umbrella policy in place for two reasons.
- One, if you don’t have the appropriate coverage, the person can sue you and the assets you’ve worked so hard for can be seized.
- Secondly, if the injured person needs expensive medical treatment, most people would want to be able to help with those expenses.
How Much Coverage Do You Need?
The right amount of umbrella coverage depends on your assets, your income, your profession and your aversion to risk. Most people protect assets like an investment portfolio or vacation home but never consider their income as an asset. Wage garnishment as a result of a liability claim is a growing trend. Getting additional coverage is not just about protecting traditional assets.
You buy umbrella policies in million-dollar increments. And the cost is relatively inexpensive. An extra $1 million in coverage will cost about $300 per year. But that doesn’t take into account additional family cars, boats or all-terrain vehicles. There will be additional charges for those. And don’t forget, you need to have specific coverage limits within your current policies before you can qualify and then go ahead and purchase the umbrella policy. But in general, it’s a no brainer when it comes to the cost and the amount of coverage you receive. It’s a standard recommendation to our clients to purchase an umbrella policy.
You need to look at your current level of assets, and then determine how much coverage you need. Our rule of thumb to help you make that decision is that you should have a minimum of $1M in coverage or two times your net worth. This will provide you with a good range of what you’ll need. As always, you need to take your personal, financial situation into account.
Pros of Umbrella Insurance
Twenty years ago, the chance of you being in a catastrophic law suit would have been a rarity. In this world that we live in today, it is more likely that you could get sued at some point in your life. If someone decides to sue you for a reason that is covered by your policy, the umbrella policy would pay the claim and defense costs. Defense costs can be a very large number, oftentimes exceeding the actual settlement.
Besides protecting your own assets, having an umbrella insurance policy can help the other person involved. In most cases, an accident that results in personal injury is devastating, not only to the person who got injured, but also to the person who caused the accident. Having additional coverage for this situation can help alleviate the costs associated with the injury, protect your assets for your family and also help you re-establish peace of mind.
Cons of Umbrella Insurance
The only real downside is the cost. For folks with assets to protect the costs amount to very little. However, don’t assume that all umbrella policies work the same way as there are major differences between policies. Be sure you understand what is covered and what isn’t. For example, some polices only cover liability claims that arise in the United States. If you happen to travel internationally and something happens outside of the U.S., you could have a serious problem. For your own peace of mind, consult a financial planner or independent insurance agent well versed in umbrella insurance. They can can ensure you have the coverage that you need.
What should you do?
For most people, an umbrella policy is a good idea. You have spent a lifetime building assets, including your income to provide for your family and prepare for your retirement. The last thing you want is to get sued for all you are worth. Accidents do happen and the more you are worth or earn, the greater the likelihood the injured person will go after you.
For more information, listen to our podcast on umbrella insurance below:
