Finance

Should You Carry an Umbrella?

umbrella insurance

My wife recently took over the treasurer duties of her volunteer group. To complete the transition, she needed to meet with an outgoing board member at a near-by bank. Unfortunately, the outgoing board member did not show up as expected. Less than a block away she was in an accident where she allegedly hit a motorcyclist who broke his wrist and ankle, had no insurance and was riding a friend’s bike. The latest update is that her insurance company has transferred her case to “large claims” whatever that is (doesn’t sound good). As a result of this experience, we decided to look into umbrella insurance because you never know when it might happen to you.

What is Umbrella Insurance and What it Covers

Umbrella insurance extends liability coverage for property damage and injury for which you are liable. Coverage supplements other forms of insurance such as auto and homeowners. It can also help cover legal fees.

The main purpose of an umbrella policy is to protect you and your assets from the financial fallout of common risk scenarios. If you get into an automobile accident or someone has a mishap involving your property, you may be held responsible for damages or injuries. Umbrella policies cover any resulting liability that exceeds the amount covered by your other standard insurance policies.[1]

Umbrella policies can also be written to provide a broader form of coverage not covered by the underlying policies, such as libel, slander and false arrest. A common consideration is protection from legal action directed at a board (such as a homeowners’ association) of which you are a director.

Do You Need Coverage?

The decision of whether to carry umbrella insurance should include (but may not be limited to) these factors.

  1. Total value of your assets like home equity, other real estate, savings and checking accounts, brokerage accounts, retirement accounts, art, jewelry, cars and commodities. You might also want to include the present value of your future income stream.
  2. Whether the total value of your assets exceed your existing coverage.
  3. Risk – scope and tolerance. Many things factor into the scope of your risk of being sued: lifestyle; property ownership; driving habits; occupation; volunteering; hobbies; and any activity that puts others in harm’s way. Risk tolerance simply means how willing (acceptance) or unwilling (transference through insurance) you are to suffer the consequences of possibly being sued.
  4. How much you value your financial security or “how much can I afford to lose and still achieve my financial goals”?

Here are some examples of situations that lead people to purchase umbrella insurance.

  • Have substantial savings or assets.
  • Want to protect against the loss of future income.
  • Own investment property.
  • Have a pool, or certain pets or a trampoline.
  • Are business owners.
  • Coach sports.
  • Ski, ride a motorcycle or have firearms.
  • Are members of a board.

How Much Coverage Should You Get?

To figure this out you need to work with your insurance agent and/or financial advisor.

You should carry enough to cover your taxable assets over and above your existing coverage limits. You can exclude 401(k)’s, pensions, profit sharing and employee welfare plans (such as flexible spending accounts) because they are protected from civil lawsuits, creditors and bankruptcy by federal law (ERISA[2]). However state law determines whether other plans such as IRAs, Keogh, 403(b), government plans and employer-only plans, are at risk. The value of your home may also be protected depending on your state’s homestead exemption (note that a Homestead Declaration may need to be filed).

How Much does it Cost?

The price of obtaining $1 million of personal liability coverage is relatively low, generally costing between $150 and $300 per year. For every additional $1 million of financial protection, the incremental premium costs gradually decrease.

We decided to contact our insurance agent to obtain umbrella insurance.  Our agent helped us determine how much coverage we needed and of course provided a quote. As part of the process we had to increase the liability limits of our existing auto policies.

Overall I’m satisfied with our experience and appreciate the peace of mind umbrella insurance provides should we one day find ourselves in a situation like my wife’s volunteer colleague.

Note: I am not an insurance agent or financial advisor. I’m simply sharing our experience and not making any recommendations. You should always consult with a financial advisor when it comes to making your decisions.

 

[1] According to Matthew Kenigsberg of Fidelity Financial Solutions

[2] Employee Retirement Income Security Act

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