Mary Kane
Insurance is made for the unexpected in life, but you may not realize you don’t have enough liability coverage until it's too late, especially the situations you never thought to anticipate.
The neighbor’s child falls from your trampoline and breaks his arm, requiring extensive surgery. Your Airbnb guest slips on your stairs. Your nonprofit gets sued, or that restaurant you didn’t like hires a lawyer.
People are often surprised by circumstances that can lead to their personal liability exposure. And they sometimes also wrongly assume that the liability coverage on their home insurance or auto insurance would be enough to cover their expenses if accidents happen or they get sued.
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If you're retired or close to it, shielding your assets from these risks is more important than ever. These are the assets that are supposed to sustain you throughout your golden years, so you don't want to risk losing them in a lawsuits.
Umbrella insurance is one of the easiest and most affordable tools available to make sure your dream retirement isn't spoiled by a single accident. Here's what it is, how it works and everything else retirees should know about the often overlooked type of insurance.
What is umbrella insurance?
One option for liability worries is umbrella insurance, which is extra liability coverage on top of what's already included in your home or car insurance policy.
Umbrella policies are relatively cheap, with a typical annual cost of about $150 to $300 for each $1 million of coverage. The coverage kicks in after home or auto liability limits are exhausted.
You typically buy a separate umbrella policy from your current insurance carrier. Standalone umbrella policies are not common, but you may find one by shopping around.
Umbrella insurance protects your financial wellbeing
People tend to understand insurance when it comes to something tangible, such as their car, but your financial wellbeing is just as important to protect.
If you were found at fault in an accident where the damage and injuries exceeded the maximum payout your car insurance's liability coverage will pay, you're on the hook for the rest.
If an Airbnb guest sues you after getting injured in your home and the lawsuit is worth more than your home insurance's liability limit, you'll have to pay up.
That could mean wiping out your emergency savings, tapping into your home equity or other drastic financial moves to cover the difference in what's owed. That's where umbrella insurance comes in.
How to get the right amount of umbrella insurance
As mentioned earlier, umbrella insurance is rarely sold as a standalone policy. You'll typically add it on to your home or car insurance. But, how much umbrella insurance do you need?
Aim for total coverage (including your existing liability coverage) worth at least as much as your net worth. That includes your home equity, retirement accounts and any other savings or assets you own. If it could be taken in a lawsuit, you want to include it in your calculations here.
If the liability limits on your existing home and car insurance are enough to cover that or could be bumped a little higher to make up the difference, you probably don't need umbrella insurance. But, if your net worth is higher than those policies are able to cover, look into adding on this important coverage.
To see if you can save by just raising the liability coverage limit on your insurance, use the Bankrate-powered tool below to compare quotes on car insurance with higher liability limits:
Usually bundling an umbrella policy with your other coverage will save you money on premiums, but be sure you coordinate all your coverage correctly.
Insurers often ask you to max out your existing liability coverage, or at least bump it up to a specified amount before your umbrella insurance kicks in.
Say your insurer recommends you have $300,000 worth of liability coverage on your home and auto, but your current policies only have a $100,000 limit.
If you then purchase a $1 million umbrella policy on top of that, your insurer might only pay out a maximum of $700,000, because the other $300,000 was supposed to be covered by your home or auto policy.
If you had the recommended $300,000 coverage on your other policies, you wouldn’t have come up short.
Umbrella insurance is especially important for retirees
At the start of the career, your net worth is probably low enough to fall within the range of standard liability coverage. But, as you near retirement, you've likely paid off your home (or are close to it) and amassed a healthy retirement fund.
Umbrella insurance might seem like an unnecessary added expense. But, a single lawsuit could take a significant chunk out of the net worth you've worked so hard to build over the last couple of decades.
So, if you haven't looked into it yet, reach out to your insurer to see about adding it on. For a few bucks a month, you can make sure your golden years stay golden.
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