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What is Umbrella Insurance and
Does it Make Sense for Me?

By Chuck Stanley, CFP®

Most people do everything in their power to avoid addressing anything in their lives involving insurance.

The reason for this is that insurance, by its very nature, deals with the probability of an adverse event occurring in their lives. There are, as most of you know, many types of insurance. People are most familiar with life insurance, homeowners/auto insurance and health insurance.

One type of insurance that most people are unfamiliar with is excess liability insurance, commonly known as Umbrella insurance.

Before you read further, please consider this. As a Fee Only CERTIFIED FINANCIAL PLANNER (tm), I don't receive any compensation from the insurance industry for recommending this coverage. I only recommend it to protect my clients and provide them with peace of mind by protecting their assets from civil liability.

The best conceived financial guidance can be rendered useless by ignoring this aspect of your financial plan.

No matter how well you do investing for your future it could be lost in the blink of an eye if you, or your family, are involved in an incident in which you are judged civilly liable.

Many of you are probably thinking that you already have liability coverage through your homeowners and auto policies. You are right, BUT carefully review the limits on that coverage. Most primary insurance policies limit their coverage to amounts up to $500,000 and many policyholders select a coverage amount lower than that. Think for a second, how many of you read about various types of accidents in which someone was critically injured and faced years of medical and rehabilitative treatment. Can you even begin to fathom what this treatment will cost with hospital expenses as they are today? We've all seen the huge civil judgments awarded to the victims of these accidents.

I'm sure you all realize that even $500,000 of coverage is going to be insufficient to protect you in the event you're unfortunate enough to be subject to a lawsuit resulting from an accident of this type. There is a solution and, in most cases, it is relatively inexpensive. That solution is an Umbrella or excess liability insurance policy. It is often called an Umbrella policy because it sits on top of the underlying coverage of your homeowners and auto policies.

For example, let's say you have $500,000 worth of coverage (each) on both your homeowners and auto policies. If you obtain a $1,000,000 Umbrella policy your liability coverage is now extended to provide $1,500,000 of coverage. Most of you are probably asking how much does a $1,000,000 Umbrella policy cost. Surprisingly, it is usually relatively inexpensive. Depending on the underwriting risks that you have, it could be as low as $200 to $300 annually.

Now I grant you that the probability that any one of you being involved in an accident of this type is remote, but you have to ask yourself if it's not worth having this coverage to protect the future of both you and your family. Do you own a swimming pool, trampoline, personal watercraft or all terrain vehicle? Consider the potential added risk, to your financial well being, that owning any one of these presents.

There are a few considerations you should be aware of.

Many insurance companies require you to have both your homeowners and auto policies with them and you have to opt for the highest liability amount provided for under those policies before they will provide an umbrella policy for you .

Make sure there is no gap between the maximum coverage provided for in your underlying policies and the coverage provided by your umbrella policy, exposing you to additional liability.

Umbrella policies do NOT cover intentional acts or civil awards for punitive damages. They also don't cover any accidents resulting from operating a business. There is separate coverage for this business risk.

How much coverage will you need?

This is a difficult question to answer. The conventional wisdom is you should have coverage to match the amount of your net worth. Understand that the possibility exists that you may be sued for an amount in excess of even your Umbrella coverage. In the event that you were found liable to this extent, your personal assets and/or future earnings could still be in peril. I think the answer differs for everybody according to your financial situation and tolerance for risk. You should consult with your financial planner and insurance agent to determine what amount of coverage best suits your needs.

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