Additional insurance to protect your assets and future
Why doesn’t anyone ever suggest that your shouldn't buy an umbrella liability policy? It seems like additional overall security for pennies. Sure, you can spend pennies paying for something you don’t need or will never use, but isn’t that the argument against all insurance? Let’s run some numbers and see if this kind of policy protects you.
As a financial planner we help people make wise money decisions, including protection of what you’ve accumulated over the years or are about to accumulate. To those ends, an umbrella liability policy adds another layer of insurance to your home and auto liability coverage. Umbrella liability usually comes in increments of $1 million and costs about $200 a year for the first million.
Who Needs an Umbrella Policy?
Umbrella liability beefs up regular coverage for those who have assets and income to protect, those with swimming pools, trampolines, nasty pets, or owners of more than one car – especially if a teenager drives one of them. Travel a lot to dangerous parts of the world? Host lots of fun parties? You might need a little extra coverage.
If you’re like many middle-class folks, you might have $100,000 equity in a home, $100,000 in retirement accounts and $25,000 in savings. If your auto and home liability coverage is $300,000 or more, why get this additional coverage? In many cases you don’t: most retirement accounts offer creditor protection. So now you only need protection for your $125,000 of equity and savings, right?
Here's the problem. We're talking about lawsuits and government judgments from the likes of the Internal Revenue Service, awarding plaintiffs millions and leaving you destitute. If you don’t have enough assets they can still collect, they might garnish your wages (garnishment ordered by a federal court can seize only 25% of your weekly disposable income, even less in some states’ courts).
What an Umbrella Policy Covers
So, what does an umbrella liability policy cover? According to the National Association of Insurance Commissioners:
Bodily injury liability. Covers the cost of damages to another person's body such as medical bills and liability claims as a result of injuries due to an auto accident that’s your fault, harm to others caused by your dog, injuries to a guest in your home because of a fall, or injuries to a neighbor's child who trips while playing in your yard, etc.
Property damage liability. Covers damage or loss to another person's tangible property. Examples include damage to vehicles and other property as a result of an auto accident that’s your fault, damage claims incurred when your pet shreds a friend's priceless Oriental rug, or accidental damage to school property caused by your child.
Owners of rental units. This helps protect against liability you may face as a landlord. Examples include the claims’ cost as a result of someone tripping over a crack in the sidewalk of your rental property and suing you, or your tenant’s dog biting someone who holds you responsible for the cost of injuries.
Slander. You’re also covered if you’re sued for slander or libel (injurious spoken or written statements), false arrest, detention or imprisonment, malicious prosecution, shock or mental anguish, and other personal liability situations.
Consider the example of an auto accident – your fault – where others are hurt to the tune of $500,000. The bodily injury limit on your auto insurance tops out at $300,000. Who covers the remaining $200,000? Your umbrella policy.
It does not cover:
• intentional damage by you or a member of your family in your household
• damage related to a business activity
• professional claims connected to an agreement or contract
• claims resulting from owning, maintaining and using non-traditional recreational vehicles such as airboats, jet skis, and planes
• damage to your own property
• damages covered by workers’ compensation insurance
• claims in relation to insurrection or war.
Your personal policy will have specific language as to what is - and what is not covered, but at least now you can begin thinking intelligently about whether you need one. It's often worth the nominal cost as your coverage will significantly improve providing you with additional protection.
Call me if you wish to discuss whether an umbrella policy is right for you.