As you think about insurance, areas like healthcare, auto, homeowners, and life insurance are often the first areas to come to mind. However, a missing piece for many insurance plans is umbrella insurance. This typically affordable insurance can protect your assets from an unexpected event that may severely damage your finances. In this article we will discuss what umbrella insurance is and whether you should have one.
What is Umbrella Insurance?
An umbrella policy is also known as excess liability coverage. Although your homeowners and auto insurance policies include some level of liability coverage, an umbrella policy increases your amount of coverage. This policy protects you from a catastrophic financial loss that could result from an expensive lawsuit. These lawsuits could arise from events such as an injury incurred while swimming in your pool, a bite from your dog, or an auto accident that you caused.
Who Should Get Coverage?
If you have a net worth that is higher than your liability coverage through your homeowners and auto owners policies, or you expect to have a net worth greater than this coverage level, you should look into an umbrella policy. You also may want to consider a policy if you expect meaningful income over the rest of your career as liability lawsuits can go after both your future income and your assets.
The likelihood of being a target of a lawsuit may be higher if you:
- Own a pool or trampoline.
- Own certain types of dogs.
- Are on the board of a nonprofit.
- Coach youth sports.
- Own a second home.
- Have a teenage driver.
- Host large events at your home.
How Much Coverage is Needed?
To determine how much liability coverage you need, you should start by calculating your net worth. Certain assets like a 401(k) account at work are protected and don’t need to be included in this amount. Your primary residence and IRA accounts may potentially be excluded from this amount as well depending on the laws in your state.
If you are working, you may want to consider additional coverage to protect your potential future earnings. To account for this, you could multiply your current income by five and add this to the amount needed to protect your assets. This exercise is a starting point as you determine the appropriate amount of coverage
How Much Does an Umbrella Policy Cost?
The cost to obtain $1 million of coverage could be as low as $150 to $400 per year. The low cost reflects that no payments are made from the umbrella policy until the liability amount exceeds the coverage limits of other applicable policies. Most insurers require someone to have $300,000 of liability coverage under their homeowners policy and $250,000 of liability coverage under their auto insurance policy to qualify for a $1 million umbrella policy.
Next Steps
If you don’t have an umbrella policy, it is worth looking at your financial picture and seeing if it makes sense to add one. If you do have this policy in place, it is important to periodically review the amount of coverage you need and whether your current policy is adequate. This low cost insurance protects you against unlikely events that could be very costly and is an important part of your risk management planning. If you would like to talk to a financial planner about how an umbrella policy fits with your finances, please schedule a call with us here.