Here’s something you probably already know: everybody’s suing everybody these days. So what is umbrella insurance and how does it help? No, it is not insurance for the thing that keeps your head dry when it’s raining.
Umbrella insurance is a special type of insurance policy that can provide liability protection above and beyond what is in standard homeowners and auto insurance policies. In other words, it provides an umbrella of protection over potentially vulnerable areas of risk.
The fact of the matter is you can be sued for just about anything. Now, whether or not such a lawsuit has merit is beside the point. I hate to be glum, but the cold reality is that 99.9% of Americans are just one lawsuit away from having their entire life’s savings wiped out. Even those in the upper echelons of society face this risk—and, in fact, may be even bigger targets due to their sizeable wealth.
You may have heard of excess liability insurance, more commonly known as umbrella insurance. If you have heard of it, I hope you’ve taken the next step and purchased a policy. If you haven’t, listen up.
An excess liability policy is insurance if/when you become liable for unintentional injuries to another person or their property. “Excess liability” means the policy kicks-in only after you’ve maxed out other insurance policies (i.e. homeowners and auto).
In other words, it acts as an umbrella, protecting you over and above traditional insurance. While homeowners and auto insurance typically limit liability coverage to under $500,000, umbrella insurance is sold in increments of $1 million. At first blush $500,000 sounds sufficient, but consider the going rates for attorneys’ fees and hospital visits.
Say, for example, you’re in a car accident and it’s your fault. If the other driver sues you for $1 million, here is how your insurance would work:
- You pay the auto deductible. Say it’s $1,000.
- Your auto insurance then pays up to the liability limit stated in the policy (which is initially chosen by you). In this case, say it’s $250,000.
- If you did not have umbrella insurance, you’d personally be on the hook for the remaining $749,000. The courts could raid your bank accounts, retirement accounts, or even non-liquid assets like real estate. If that’s still not enough, the court can garnish (i.e. take) your paychecks.
If you aren’t yet convinced, here are the top 5 reasons to buy umbrella insurance now.
1. It’s cheap.
Dollar for dollar, umbrella insurance is one of the best deals around. In general, $1 million of umbrella insurance should cost less than $400/year, per insurance company ACE. For $10 million, expect to pay around $1,000/year; so, for less than your cable bill you can essentially protect yourself from insurmountable financial ruin!
If cost is still a factor, you could increase the deductibles on your homeowners and auto insurance policies. For example, bumping your auto deductible from $200 to $1,000 could lower your annual premium by as much as 40%, according to the Insurance Information Institute.
2. It’s not just for the uber-rich.
Being rich and famous certainly makes you a target for frivolous lawsuits. But if you check any of the following boxes, you are at risk, too:
- Have a pool, trampoline, playset, treehouse, etc. accessible on your property
- Own dogs or other animals
- Own rental property and/or vacant land
- Have ATVs, go-karts, golf carts, etc. accessible on your property
- Drive nice cars or own “nice” things that are visibly obvious
- Frequently host friends/parties at your house
- Frequently post on social media, or have kids who do so
- Serve on the board of a non-profit
- Employ domestic workers (i.e. maids and nannies)
While catastrophic events are statistically unlikely, the downside financial risk is nearly unlimited. Look at this list and imagine all the things that can possibly go wrong. Accidents can happen any time, any place, and to anyone.
3. It covers more than you think.
It is easy to visualize the usefulness of umbrella insurance when it comes to bumps and bruises. But umbrella insurance covers so much more. It can pick up the tab if you’re accused of slander or libel, defamation of character, and even “mental anguish”. Court costs and attorney fees are covered, too.
Perhaps most importantly – umbrella insurance also covers the actions of anyone in your household, such as a spouse and/or kids. Need I remind you of the decision-making abilities of today’s youth?
4. You have nothing to gain and everything to lose.
You probably don’t need $10 million of umbrella insurance, but you definitely need more than $0.
According to Jury Verdict Research, almost 15% of personal injury liability awards are more than $1 million. It’s not unheard of for settlements to be ten times that amount, or more. In 2011, a jury awarded $150 billion to the family of a burn victim who later died, making this the largest personal injury award in U.S. history.
What would you miss more: your life’s savings, or a few hundred bucks a year in insurance premiums?
5. Lawyers don’t care if you’re not guilty.
It doesn’t even matter if you were a party to, or present at, the event in question. If one of your children gets into a car accident or slanders a friend on Facebook, the blame can be shifted to you.
And if you (or someone in your household) are one of multiple defendants – you better hope you aren’t the richest person in the room. Lawyers typically go after the wealthiest defendant, regardless of their level of culpability. While some may view this as unfair, lawyers can hardly be blamed – most personal injury attorneys are compensated based on the outcome of the case. Someone worth $5 million is more profitable than someone worth $50,000.
Umbrella insurance is the closest thing to a no-brainer when it comes to financial planning. Contact your homeowners/auto insurance agent if you’re ready to take the next step – the process should be more seamless if you use someone who already knows your other insurance policies (and you may get discounts as well).
Contact us today to review how your insurance fits with the rest of your financial plan!
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