Is an Umbrella Policy Right for You?
It’s a beautiful Spring day. Peg and Dylan just moved into their new home and are hosting a housewarming party. They have invited friends, family, and several new neighbors. As everyone crowds around the backyard table raving about Dylan’s crab dip, a cracking noise is heard. The group collectively looks up to see a tree branch falling directly toward the table…
Aditi’s son, Zahir, just got his driver’s license. He completed a professional driver’s training course and months of practice and now has occasional use of a family car. After taking a few friends to the mall, Zahir pulls out of the parking lot just after dark. He doesn’t see another group of kids darting across the street ahead…
In our journey through financial planning, we often focus on managing expenses and building assets. However, unforeseen events can derail even the best laid financial plans. Hopefully everyone escapes unscathed from events like the examples above, but if not – and even if injuries are minor – substantial liability can result. We live in a litigious society, and accidents that occur on our property, by our children, or through our own mishap, can result in surprisingly high liability costs. An umbrella policy can provide additional protection against financial loss in these situations.
What Is an Umbrella Policy?
An umbrella insurance policy serves as an extra layer of liability protection that extends beyond the limits of standard insurance policies, such as auto, homeowners, or renters insurance. It acts as a financial safety net, stepping in when the liability limits of your existing policies are exhausted.
Coverage Includes:
Bodily Injury Liability: Costs associated with injuries to others in accidents where you're determined to be at fault.
Property Damage Liability: Expenses related to damage caused to someone else's property.
Personal Liability: Legal fees and damages from lawsuits, including defamation, slander, and libel.
Who Should Consider an Umbrella Policy?
In some cases, traditional auto and homeowner policies can provide sufficient coverage. In other cases, the liability limits available in those policies isn’t sufficient to mitigate potential financial risks. You may want to consider an umbrella policy if:
You Have a High Net Worth or a High-Profile Job: Lawsuits often target those who have (or are perceived to have) significant assets. If your assets exceed the liability limits of your standard policies, an umbrella policy provides additional protection.
You Own a Home: Owning property introduces potential risks, such as accidents on your premises.
You Frequently Entertain: Regularly hosting guests increases the likelihood of incidents leading to liability claims.
You Own a Pet: Animals, regardless of temperament, can sometimes cause unintended harm. (Picture an elderly neighbor tripping over your cat while descending the stairs.)
You Have a Taste for Adventure: Hobbies like skiing and boating can create opportunities for exposure.
You Live to Serve: Engaging in activities like coaching youth sports or serving on boards can increase liability risks.
How Much is Enough?
If you have decided to purchase an umbrella policy, the next step is choosing the appropriate level of coverage. While there is no limit to the potential amount of a lawsuit against you, as a rule of thumb you can start by purchasing coverage equal to your “unprotected” assets. Assets protected against lawsuits and creditors vary by state, but examples may include:
Retirement Accounts
College Savings Plans
Home Equity
Personal Property
Social Security Benefits
Trusts
Some states provide greater protection for employer retirement accounts and rollover IRAs than contributory IRAs (inherited IRAs are typically not protected). Certain states may impose limits on the amount of protection for assets like IRAs, home equity, or personal property as well. At a minimum, consider purchasing coverage that exceeds your taxable brokerage and savings account balances, since these are typically not protected. Understand the limits imposed by your state to fully estimate your coverage needs. Even future wages could be subject to garnishment in a lawsuit, though, so additional coverage could be warranted depending on your profession.
What Will I Pay?
Fortunately, umbrella policies are generally affordable, with premiums averaging between $150 to $300 annually for $1 million in coverage. Additional coverage increments are available at relatively low costs. Be aware that you may be required to increase the limits on your auto and homeowner policies to coordinate with the umbrella policy as well. Umbrella premiums may also be higher if you have past liability claims or significant risk factors.
The Bottom Line…
An umbrella insurance policy is a prudent investment for those seeking to protect their assets from unforeseen liabilities. By providing coverage beyond standard policy limits, it ensures that your financial future remains secure against potential legal claims. Evaluating your personal risk factors and consulting with your Financial Planner and an insurance professional can help determine the appropriate coverage level for your needs.
This article is for informational and educational purposes only and should not be considered investment, financial, legal, or tax advice. It is not a recommendation for purchase or sale of any security or investment advisory services. Please consult your own legal, financial, and tax professionals to determine what may be appropriate for you. Our full disclaimer may be found HERE.
