The Unsung Hero of Insurance - The Umbrella Policy
Author: Nick Prigitano
As financial advisors we understand that the topic of insurance is not the most exciting or glamorous. When we discuss insurance with our clients, we do everything in our power to keep their eyes from glazing over in boredom. Today we will discuss one the most plain vanilla policies, but arguably one of the most important, the umbrella policy. Stay with us because getting umbrella coverage could be one the best financial decisions you ever make.
What is Umbrella Insurance?
Simply put, umbrella insurance is liability or property insurance that goes above and beyond your normal policy limits. For instance, if you own a home and have $500,000 of liability coverage, if someone sued you, your insurance would help settle the claim up to that threshold. But what happens if the suit is for $1,000,000? In that case you would have to come up with the difference (another $500,000) to settle the claim. A hefty price to pay that could potentially derail any financial plan. However, if you have an umbrella policy, it will kick in once your normal policy's threshold has been met. In the same example, if you had an umbrella policy for $1,000,000, your primary insurance would cover the first $500,000, then your umbrella policy would cover the second half.
Coverage at $500,000 seems sufficient. . . right?
When reviewing your auto and home policies it is likely that your limits are in the hundreds of thousands of dollars. While that may seem like a lot of coverage, as financial planners we have seen far too many times when it is nowhere near enough. Depending on the situation, liability claims can easily get into the millions of dollars and without additional coverage, these suits can ruin a financial plan.
Who should get umbrella coverage?
Umbrella coverage should be considered for almost any financial plan. This is especially true if you have significant wealth saved or if you are more at risk for a large claim. What makes you more at risk? There are many factors to consider, but some of the more common red flags are: owning a pool or trampoline, having teenage drivers, and owning a dog. If one or more of these applies to you, it is highly encouraged that you look to review your coverage and consider adding an umbrella policy to it.
How much do I need?
As a general rule of thumb, you want to have enough insurance to cover your net worth. If between your home and investments your net worth is $1,000,000, getting an umbrella policy to match that is a good start.
That's a lot of insurance. How much does it cost?
While the coverage can be high (going into the millions of dollars) the cost is generally not. According to the Insurance Information Institute, a $1,000,000 policy costs about $150-$300 a year ($12.50 - $25 a month!)1 However, in order to qualify for most umbrella policies your insurer will require some minimum coverage. Typically, they will require at least $250,000 on an auto policy and $300,000 for homeowners.1 If you don't currently have the minimum coverage you would have to increase it, which will also increase your cost.
In today's litigious society the case could be made that there is no reason to not have some sort of umbrella coverage. At such a relatively low cost for the coverage it is almost a no brainier. The gap between the cost of the insurance, and the cost of a potential lawsuit is monumental. The last thing you want to happen is have your financial future ruined by nasty slip and fall. To review your insurance needs, and to see if a policy fits in your financial plan, it's best to speak with a financial advisor or your insurance agent.