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Do you need umbrella insurance?

Umbrella insurance is a relatively inexpensive way to protect your current wealth or potential future earnings. A $1M policy usually only costs $150-300 per year, making it a relatively inexpensive way to help ensure you are protecting your hard earned savings. . 

What is an umbrella insurance policy?

Umbrella insurance, also known as excess liability insurance or personal liability insurance, provides coverage over and above your existing insurance such as home or auto. It kicks in when there’s an incident that costs more than your existing policies cover, such as a bad car accident in which people are injured. It may also cover you in other areas not covered by your current policies (such as libel or slander). 

As an example, let’s say you have $500K of auto insurance and get in a crash where you’re considered to be at fault. The people in the other car sustained significant injuries and some were unable to work for a while. Such an incident could easily cost over $1M, thus you’d be on the hook for any amounts beyond the $500K your auto insurance policy covers. An umbrella policy would step in and cover any amounts beyond what your auto policy covered (up to the umbrella policy limit).  

The other benefit of an umbrella policy is that they cover court costs and attorney fees for you. So if you’re party to a lawsuit (even one you consider frivolous) in an area covered by your umbrella policy they will take care of those legal costs. 

Who might benefit from umbrella insurance? 

The majority of umbrella insurance claims come from auto accidents so a lot of people could potentially benefit from an umbrella policy. High net worth families with assets to protect are most commonly encouraged to get an umbrella policy. However, your wages can be garnished in a liability lawsuit so those who may not have accumulated much wealth yet but earn a high income can also benefit from an umbrella policy. 

An umbrella policy can cover your whole family so those with teenage drivers are also often encouraged to get an umbrella policy. Dog bites can also result in surprisingly high personal liability suits so many dog owners also benefit from these policies.

Here are some others commonly recommended to consider an umbrella policy:

  • Rental property owners
  • People with recreational vehicles (such as ATVs, dirt bikes, jet skis, or boats)
  • People with pools or water features on their property
  • Youth sport coaches
  • Board of director members
  • People who commonly host larger parties or get togethers

Note that umbrella policies do not cover intentional or criminal acts or omissions or business losses. For example, if someone in your family gets in an accident while driving under the influence, the resulting liability will not be covered by your umbrella policy. 

Fortunately, it’s unlikely you’ll ever need your umbrella insurance (which is the reason the policies are relatively inexpensive). However, it’s much better to be in a situation where you and your family are protected from potentially life altering financial losses.

Scott Caufield, CFA, CPA