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Why You Need an Umbrella Policy
Adding extra liability coverage to your auto- and homeowners-insurance policies can protect your finances from expensive lawsuits.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
July 22, 2010
We have homeowners and auto insurance with $300,000 in liability coverage, but someone suggested that we get a $1-million personal-liability umbrella policy. Why would we need this much coverage?
"As long as you can earn a livelihood, you should have an umbrella liability policy,"says Mitch Freedman, a CPA and personal financial specialist in Westlake Village, Cal.
He recommends that everyone have at least a $1-million umbrella policy to provide liability coverage beyond the limits of their auto- and homeowners-insurance policies -- even if they have less than $1 million in assets. That’s because in the rare event you are sued, you could be forced to pay a legal judgment from your current assets and future earnings. The policy can also pay for defense costs, which can quickly add up even if you win your case. It’s an inexpensive way to protect your finances from devastating lawsuits.
Freedman recommends getting more than $1 million in umbrella coverage if you earn more than $100,000 per year or have more than $1 million in assets. “Our clients get liability-insurance limits that are at least as much as their net worth,” he says. Daniel Morris, a CPA in San Jose, recommends at least a $2-million umbrella policy for most people, or a policy for $3 million to $5 million if you have rental property.
The price varies by risk, but someone with one house and two cars would generally pay about $200 a year for the first $1 million in umbrella coverage and another $100 for the next $1 million, says Bill Howard, an independent insurance agent in Alexandria, Va.
Umbrella policies are inexpensive because they kick in only after you’ve exhausted your liability coverage under your auto or homeowners policy. Most insurers first require you to have $300,000 or $500,000 in liability coverage on your car and home. For example, if you have $500,000 in liability insurance on your auto policy and a $1-million umbrella policy, you’ll have a total of $1.5 million in liability coverage.
If you’re looking for extra cash to afford the umbrella policy, Howard recommends raising your auto- and homeowners-insurance deductibles. Boosting your deductible from $250 to $1,000 could reduce your annual premiums by hundreds of dollars, make you less likely to file small claims -- which could jeopardize a claims-free discount or could even get you dropped from your policy -- and still leave you with only $1,000 in out-of-pocket expenses for each claim. Then you can use the premium savings to boost your coverage by hundreds of thousands -- or millions -- of dollars.
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Reader Comments (5)
Posted by: LBowie at 07/23/2010 09:47:45 AM
Remember you usually get sued because you are right and look like a deep pocket, not because you are wrong. It has happened 3 times to me, well worth the piece of mind.
Posted by: R. James at 07/25/2010 02:05:21 AM
I believe this would further encourage someone to sue you if they learned you had this extra insurance... my lawyer got very excited when he saw that a party involved in my case had this extra insurance...and we received more money than I normally would have expected.
Posted by: Holly at 07/25/2010 08:13:56 PM
Great advice! When I was beginning my career in insurance, I was taught the importance of liability coverage. If, for example,your house were to burn down, you know how much you would stand to lose. But, if you are sued, you have no idea how much you could lose. Thanks, Bo, for your great tutelage!
Posted by: Lori at 07/26/2010 11:02:12 AM
Could you please tell me what you think about if church-based pensions are any safer, as a result of financial reform? My mom works as a nurse for a church-owned hospital. Church-based pensions don't have to be insured by PBGC (and thus, most aren't). She will retire in a year, and I am trying to help her figure out what to do with her pension. Since her pension is not insured, she has no guarantee that she will have it throughout retirement. During this era of economic downturn and healthcare restructuring, we are especially worried it will go away. Her options are to gamble and take the monthly pension payout (and hope her pension doesn't vanish even though it isn't insured) or to take a lump sum. If she took a lump sum, she has two options: 1) Buy an annuity. Pro:: Could pick an annuity company that seems on better financial footing than the hospital company she works for. Con: Pays less (by 30%) than her pension, and still has no insurance. 2) Invest very conservatively, keeping a big cash reserve Pro:: Covered by FDIC insurance. Con: It would quickly get used up during the beginning part of her retirement. I don't know how many people are affected by this like my mom, but it sure adds a huge degree of uncertainty to financial planning for her retirement. Any insights you could add would be greatly appreciated! Regards, Lori
Posted by: Loyd at 08/30/2010 02:14:57 AM
An umbrella is an absolute must have these days. It costs next to nothing when you add it to your car and home insurance coverage and guarantees peace of mind. However what R. James said above can be one huge minus point to this coverage. Maybe the other party sues you for more if they know youre carrying Umbrella insurance?...