The Importance of Personal Umbrella Policies

In today’s litigious world, it is always a good idea to take reasonable measures to protect your assets from lawsuits. On the other hand, it doesn’t make sense to spend more time and money than is necessary to protect yourself and your family. In some situations, it might make sense to transfer the bulk of your assets into a well-drafted trust to help protect them from being subject to recovery in a lawsuit. However, that type of trust is likely to include many restrictions that can significantly reduce your financial autonomy, not to mention the cost of drafting, the higher trust tax rates, and the aggravation of a more complicated tax structure. Sometimes, there is a simpler and cheaper way to achieve the same goal: a personal umbrella policy.

What follows is a combination of my thoughts and an article that I purchased the rights to publish.

Many car, homeowners, fire, etc., insurance policies top out at around $500,000 of liability coverage. That may not be enough.

That’s where an umbrella policy (also called an excess liability policy) can make a big difference. An umbrella policy kicks in when your other liability policies (such as your car insurance) hit their limit. For instance, let’s say you are involved in an accident and are being sued for $1 million, but your car insurance covers only $300,000. In that case, your umbrella policy could cover the difference so you don’t have to use personal assets.

Clearly, then, an umbrella policy can be useful in helping to protect your assets from larger claims and lawsuits.

To have an umbrella policy, you need to have the other insurance policies, such as car or homeowner’s insurance, already in place.

Make sure there isn’t a gap between your other policies and your umbrella policy. Where your car insurance ends, for example, the umbrella should take over—otherwise, you’re on the hook for that gap. And if the underlying car insurance policy is not addressing certain risks, then the umbrella policy can also miss covering these risks.

A Big Enough Umbrella?

A general rule of thumb is that if your net worth is $20 million or less, make sure your umbrella policy covers what you’re worth.

I disagree.  Everyone is a snowflake and the amount of coverage that I would recommend an individual acquire will vary widely depending upon that person’s specific situation. For example, if most of your wealth is in an IRA or retirement plan, you already have some built-in creditor protection.

The Cost of Coverage

How much will a hefty umbrella policy set you back? A number of factors determine the cost of coverage, including:

  • Number of homes and where they are located
  • Number of cars and the number of people being covered (including their driving histories)
  • Number of boats and planes
  • Amount of existing liability coverage you have before adding the umbrella policy

The good news is that umbrella policies tend to be relatively inexpensive because the severe occurrences that trigger them are uncommon.

The upshot? If you don’t have an umbrella policy, run—don’t walk—and get one. If you do have an umbrella policy, make sure you’re sufficiently covered—and boost that coverage amount if you’re not. If you are interested in increasing your coverage, the most logical next step is to contact the agent with whom you already have coverage. If you don’t have a policy now and/or you want to get a competitive quote, please call our office and we will refer you to an appropriate company for your situation.

ACKNOWLEDGEMENT: Portions of this article were published by the BSW Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2018 by AES Nation, LLC.