June 2022
Financial Planning

Nobody’s perfect. That’s why you buy liability insurance: You can avoid financial ruin if you accidentally cause major injuries or property damage to others. Problem is, your insurance isn’t perfect, either. That’s where a personal umbrella insurance policy comes in. Think of umbrella insurance — sometimes called personal liability insurance — as a fail-safe for your savings and other assets. If you’re sued for damages that exceed the liability limits of your car insurance, homeowners insurance, boat insurance or some other policies, an umbrella policy helps pay what you owe.

What does umbrella insurance cover? 

Umbrella insurance covers you and members of your household against lawsuits involving personal injury to others, damage to other people’s property and a variety of claims such as defamation, landlord liability and false imprisonment, depending on your policy.

In addition to paying out any damages up to your liability limit, your umbrella insurance will typically also cover associated legal costs over and above that amount. For example, if you have an umbrella policy with $1 million of liability coverage, and you were sued for that full amount, your insurer would pay out the $1 million plus provide your legal defense or cover your fees. A "retained limit" — which is similar to a deductible in that you’re responsible for paying it before your coverage begins to pay out — might apply.

Details and exclusions can vary significantly between umbrella policies, but here are a few sample scenarios that would generally be covered:

• Your teenage son gets into a car accident, and the cost of injuries to other drivers is above your auto insurance liability limit.

• A houseguest falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.

How much umbrella insurance do you need?

It’s wise to have at least enough liability insurance to cover your net worth. To calculate how much umbrella insurance coverage you need, one quick method is to add up the value of your assets (including the value of your property, savings and investment accounts). Then, take a look at the liability insurance you already have through your existing policies and buy enough umbrella insurance to make up the difference.

You may also want to include potential income if you’re likely to earn much more in the near future than you do now — if you’re a medical student, for example. When considering potential lawsuits, keep in mind that employer-sponsored retirement accounts such as 401(k)s are protected from most lawsuits under the federal Employee Retirement Income Security Act of 1974 (ERISA). IRAs aren't, except for funds rolled over from an employer-sponsored account. However, IRA accounts and the equity you have in your home are often protected at least in part by state laws. Check your local laws before deciding how much umbrella insurance you need.

Insurers typically sell umbrella insurance in million-dollar increments. This means the cheapest policy available provides $1 million in coverage, the next-cheapest policy offers $2 million in coverage, and so on — so you get a decent amount no matter what you choose.

How much does umbrella insurance cost? 

An umbrella policy with $1 million in coverage costs about $150 to $300 per year, according to the Insurance Information Institute. With its high coverage limit, umbrella insurance generally offers good value for the cost. However, you may also end up paying more for your other insurance policies if you need to increase your liability coverage to meet the minimum limits required for umbrella insurance.  This last point is extremely important! 

Do not assume that your umbrella insurance picks up from dollar $1 as soon as other coverages are exhausted.  Gaps between types of insurance could still be very painful financially.  The good news is that a comprehensive insurance review by a qualified professional can help you understand where those gaps are and suggest ways to improve your risk management.

We have some great resources to help you with that, so please call the office or your advisor so we can give you guidance and direct you appropriately!

If you have questions, please contact us.

MARKET UDPATE
TAX PLANNING
401(K) ALLOCATION
GRAPHIC OF THE MONTH

To download the June 2022 Newsletter: CLICK HERE