The Complete Guide to Umbrella Insurance
As your net worth increases, creditors and predators are more likely to go after your assets. Thus, affluent individuals and families may want to consider umbrella insurance to protect your personal financial resources.
Umbrella insurance provides extra liability protection above and beyond your existing coverage. Generally, it covers injuries, property damage, certain lawsuits, and personal liability situations.
Yet despite being attractive targets for lawsuits, the wealthy are largely underinsured. Indeed, of those with at least $5 million in personal assets, one in five don’t have an umbrella policy, according to an ACE Private Risk Services report. Meanwhile, nearly 25% of those who do have it report having less coverage than their net worth.
Ultimately, an umbrella policy can help protect your personal assets if a worst-case scenario occurs. If you don’t have umbrella insurance or aren’t sure if your coverage is complete, here’s what you need to know.
What is Umbrella Insurance?
Umbrella insurance is liability insurance that offers protection above and beyond your existing coverage. Indeed, your homeowner’s and car insurance policies will provide liability coverage up to a certain amount. However, an umbrella policy extends that coverage to higher limits.
For example, say a visitor injures themselves on your property. The visitor then sues you for an amount that exceeds your homeowner’s liability coverage. Umbrella insurance would then kick in to protect your personal assets, up to the amount in your policy.
Typically, this type of insurance becomes more valuable the wealthier you are. That’s because as your net worth increases, you’re more likely to be a target of expensive lawsuits that can drain your financial resources.
What Umbrella Insurance Does and Doesn’t Cover
Umbrella insurance covers you and your family against liability claims that exceed the limits of your other insurance policies. This generally includes:
- Others’ injuries
- Damages to others’ property
- Certain lawsuits involving libel, defamation of character, and slander
- Personal liability situations
Umbrella coverage typically applies anywhere in the world. In some cases, it may even extend to certain rental items like boats, RVs, or cars.
Meanwhile, there are certain events it won’t cover. Examples include:
- Intentional acts. If you intentionally cause damage, harm, or injure another person or property, umbrella insurance won’t cover you.
- Business losses. Umbrella coverage doesn’t extend to your business, even if you operate it from home.
- Your injuries or damage to your property. While umbrella insurance covers others’ injuries and damage to others’ property if you’re liable, it generally won’t cover your injuries and damage to your property.
Who Should Consider Purchasing Umbrella Insurance?
Generally, financial experts recommend purchasing an umbrella policy when your assets exceed your existing liability coverage. For most, this is when personal assets exceed roughly $250,000 to $300,000—the average liability limit for auto and homeowner’s insurance.
Your personal risk tolerance and exposure to risk may also determine whether you need umbrella coverage. For example, if you like to host and entertain guests, you may be at a higher risk of someone experiencing injuries at your home, which can result in a costly lawsuit.
In addition, if you have teenage drivers, umbrella coverage can help protect your financial resources in the event of an accident.
You may also want to consider purchasing umbrella insurance if:
- You coach kid’s sports.
- You’re a landlord or public figure.
- You serve on the board of a non-profit.
- You own property, pools, trampolines, guns, or dogs.
How Much Does It Cost?
According to the Insurance Information Institute, an umbrella policy costs about $150 to $300 per year for each $1 million in coverage.
Keep in mind that most insurance providers will also require you to have the maximum coverage amounts on your auto and homeowner’s policy before purchasing umbrella coverage. Depending on your existing coverage, this could increase your current insurance rates, thus increasing the total cost of adding an umbrella policy.
How Much Coverage Do You Need?
Umbrella policies are usually sold in $1 million increments, and coverage limits start at $1 million.
Indeed, each person’s situation is unique, and coverage needs will vary. However, a good rule of thumb to is to purchase enough umbrella insurance to cover your current assets minus current liability coverage.
To find this number, first total your assets. Next, subtract the amount of your existing liability coverage. You can then round the difference up to the nearest million to find how much umbrella coverage you may need.
A Trusted Financial Advisor Can Help
For many affluent individuals and families, umbrella insurance can be a key asset protection strategy. Having the right coverage can go a long way towards protecting your financial resources if a worst-case scenario occurs.
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Investment advisory services provided by Lantz Financial, LLC, an SEC registered investment adviser.
Non-investment topics discussed are for informational purposes only and should not be considered legal, tax or cybersecurity advice. Individuals should consult with their own legal, tax or cybersecurity expert concerning their own specific situation.
