Should You Own an Umbrella Policy?

As a financial planner, a good portion of my job consists of identifying and dealing with potential risks and liabilities for which my clients are exposed. One of the most comprehensive, cost-effective tools for reducing risk exposure is an umbrella insurance policy. Quite simply, if you are reading this newsletter, the purchase of an umbrella policy would be a wise decision.

What is an Umbrella Policy?

An umbrella policy protects both your current and future assets against the cost of losing a lawsuit involving your car or real estate property. Such a policy is in addition to your auto and homeowners insurance. For example, suppose your auto insurance pays $300k of medical expenses per accident, and you have a $1 million umbrella policy. If you are sued for $800k because of an auto accident, your auto insurance will pay the first $300k of damage. This also serves as the deductible on the umbrella policy, so the umbrella coverage would pay the remaining $500k of damages.

Additionally, umbrella policies cover legal expenses involved with a lawsuit. Even better, since it is the insurance company that will be paying any damages, they are likely to assign a strong (expensive) legal team to your case. Consequently, purchasing an umbrella policy is an indirect way of strengthening your legal defense team.

What Does an Umbrella Policy Cover?

An umbrella policy protects you in car accidents for which you are found to be at fault, as well as accidents that occur on your real estate property. Additionally, these policies protect you from personal injury lawsuits arising from slander, defamation, libel, malicious prosecution, mental anguish and more.  Even better, this coverage will protect you from accidents caused by your dependent children.

As you might imagine, certain factors increase your need for an umbrella policy. For instance, if you spend a lot of time in your car, or you own a swimming pool or a dog, the need for an umbrella policy rises.

Some people think they don’t need an umbrella policy simply because their low net worth doesn’t justify it. This is inaccurate because losing a lawsuit can result in the loss of both your current assets, and your future earnings. For this reason, I believe nearly everyone should have an umbrella policy.

How Do I Purchase Coverage?

In most instances, an umbrella policy can be purchased through your current insurance providers. A $1 million policy usually costs less than $200 per year, with additional coverage purchased in $1 million dollar increments and costing approximately $100 per year. At such a low cost while providing critical catastrophic coverage, there is no reason for you to not own such a policy.