Littlejohn: Umbrella insurance: are you covered?


If you don’t have umbrella insurance, it might be time to get one. This is especially true for high net worth individuals, high net worth families and heirs.

This is because umbrella insurance can provide additional liability protection beyond your existing coverage. And, as your net worth grows, creditors and predators are more likely to come after your assets.

Unfortunately, the wealthy are vastly underinsured, despite being attractive targets for lawsuits. Of those with at least $5 million in assets, one in five people do not have an umbrella policy, according to a report by ACE Private Risk Services. And, of those who do, nearly 25% report having less coverage than their net worth.

If you don’t have umbrella insurance or aren’t sure if your coverage is comprehensive, here’s an overview of what it covers, how it works, and when to buy it.

What is umbrella insurance?

Umbrella insurance is liability insurance that provides protection beyond existing coverage. It becomes more valuable the richer you are, as you are more likely to be the target of costly lawsuits.

Your home insurance policy will provide liability coverage up to a certain amount. However, umbrella insurance extends this coverage to much higher limits.

Say a visitor is injured on your property, for example, and sues you for an amount that exceeds your landlord’s liability coverage. Umbrella insurance would then fully protect your personal assets, assuming you are fully insured.

What it covers

Umbrella insurance covers you and your family against liability claims that exceed the limits of your other insurance policies. This usually includes:

  • Injury to others.
  • Damage to property belonging to other people.
  • Certain lawsuits for libel, libel and slander.
  • Personal Liability Cases.

For example, suppose you are hosting a party at your house. One of your guests accidentally falls down the stairs and injures himself, so he’s suing you for his medical bills. Once your landlord’s liability policy runs out, your umbrella insurance kicks in to cover the rest.

Alternatively, imagine your teenage son being responsible for a car accident that results in a five-car pile-up. Some of the other drivers suffer serious injuries, resulting in high medical bills and lost wages. If your auto insurance isn’t enough to cover the extent of the damage, your umbrella policy will cover additional amounts up to your policy limit.

Umbrella cover often applies all over the world. In some cases, this may even extend to certain rental items like boats, RVs or cars.

What it does not cover

There are some things umbrella insurance won’t cover. Examples:

  • Intentional acts. If you intentionally cause damage, harm or harm another person or their property, umbrella insurance will not cover you.
  • Business losses. Umbrella coverage does not extend to your business, even if you operate it from home.
  • Your injuries or damage to your property. Although umbrella insurance covers injuries to others and damage to property of others if you are at fault, it generally will not cover your injuries and damage to your own property.

How it works?

Once you have purchased umbrella insurance, your protection is in place. If you are involved in an accident or lawsuit and are found liable, your umbrella policy will cover you beyond your existing liability coverage.

Consider the following worst-case scenario:

You run a stop sign, hit another car and total it. In addition, some passengers suffer injuries.

The other car has $50,000 in damage and medical bills total $400,000. Meanwhile, the driver of the other vehicle is a cardiologist who will be unable to work for four months due to a broken hand. She’s suing you for $300,000 in lost profits.

In total, you owe $750,000. Unfortunately, your auto insurance only covers up to $250,000. With sufficient coverage, your umbrella policy will cover the additional $500,000. Otherwise, you would be responsible for paying the difference.

When to Consider Buying

As a general rule, you should consider purchasing umbrella insurance when your assets exceed your existing liability coverage. For most, that’s when their personal assets exceed about $250,000 – the average liability limit for auto and home insurance.

Your personal risk tolerance and risk exposure may also determine whether you need additional coverage. For example, if you enjoy hosting and entertaining guests, you are at a higher risk of someone sustaining injury in your home, which can result in a costly lawsuit. Plus, if you have teenage drivers, umbrella insurance can help protect your nest egg in the event of an accident.

You may also consider purchasing an umbrella policy if:

  • You train young athletes,
  • You are an owner or a public figure,
  • You serve on the board of directors of a not-for-profit organization and/or
  • You own property, swimming pools, trampolines, guns or dogs.

How many?

According to Insurance Information Institutecoverage costs about $150 to $300 per year for every million dollars of coverage.

Most insurance providers will require that you have the maximum coverage amounts on your auto and home insurance policies before allowing you to purchase umbrella coverage. Depending on your existing coverage, this could increase your current insurance rates, thereby increasing the total cost of adding umbrella coverage.

How much do you need?

Policies are typically sold in increments of $1 million and coverage limits start at $1 million. While every situation is unique and coverage needs vary, a good rule of thumb is to purchase enough umbrella insurance to cover your current assets minus your current liability coverage.

Brian Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, an independent registered investment advisory firm. He lives in Woody Creek and works with clients in the Roaring Fork Valley and beyond.


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