Protect your net worth with a personal umbrella policy

Many people believe that if they are involved in a catastrophic accident at home or on the road, their automobile and homeowners insurance will provide them with adequate liability protection. However, carefully reading these policies will reveal that each has liability limits that quickly fall far short of what’s needed to protect themselves, and personal assets may have to be used or liquidated to satisfy the courts.

Lawsuits are one of the biggest threats to your wealth; the effects can be financially devastating. For several hundred dollars per year, an umbrella policy can give the financial protection (and peace of mind) that you need to preserve the assets you’ve worked so hard to accumulate and enjoy.

What is umbrella insurance?

Protection beyond your home, vehicles, and watercraft policies

Also known as “excess personal liability insurance,” umbrella insurance sits atop your homeowners, automobile, motorcycle, and watercraft liability coverage and protects you by picking up where your other coverages leave off.

For example, if someone slips and falls on your property, the insurer of your home will pay for damages up to the liability limits on your homeowners’ policy. If the damages exceed those liability limits, you can be sued for the difference. In the case of a lawsuit, Your umbrella policy will pay for your defense and for a settlement or judgment if it’s determined that you were at fault.

What does umbrella insurance cover?

Coverage for you and your family

A personal umbrella and excess liability policies are designed to protect you from large and devastating liability claims or judgments. The coverage kicks in when your underlying liability limits (such as from a home or auto insurance policy) have been reached.

The coverage also extends beyond you as a policyholder to also include your family or, in some cases, other members of your household like domestic employees. For example, if you have a teen driver who was found liable for a major car accident the umbrella policy would help his liability including paying for the medical bills of other injured drivers. That being said, make sure you have an expert advisor explain how your policy defines a household member so you’ll actually have the coverage you need.

How much umbrella coverage do you need?

High net worth families have more to lose

How much umbrella coverage do you need? The best answer to this is to add up your assets. If everything you own, including savings and retirement accounts, adds up to worth more than $1 million, then that would be the minimum umbrella policy you need.

But keep in mind that judgments can take into account your future earnings. We generally recommend getting enough coverage to protect your net worth (minus 401Ks that are exempt from judgments) plus your estimated income for the next ten years.

For the security it provides, umbrella insurance is worth the price. It’s generally sold in increments of $1 million of coverage for roughly $200 to $400 per policy year, with each additional one million of coverage costing about $150. Of course, the rates will vary depending on where you live and how many cars, homes, and boats you’re insuring.

Important additional umbrella coverage

Excess Uninsured Underinsured and third-party liability

Umbrella coverage protects you financially if you are liable for damage or injury to another person, but what if something happens to you and the person responsible does have enough coverage? That’s precisely why Uninsured/Underinsured (UM/UIM) coverage added as an endorsement to your umbrella insurance policy is vitally important.

Your auto policy may have a UM/UIM endorsement, but there is a maximum dollar limit that may be inadequate if a large claim should arise. Your umbrella policy with UM/UIM coverage starts to pay when your auto policy has reached its limits.