insurance

Umbrella Insurance – Do I Need It?

You might think your home and auto insurance offer more than enough coverage, but if you’re wrong, one very bad day could wipe out your wealth. That’s what an umbrella policy is designed to prevent.

Umbrella liability insurance is a type of liability insurance available to individuals and companies protecting them against claims above and beyond the amount covered by their primary policies. If your liability coverage isn't enough to cover the damages of an accident or an incident on your property, a personal umbrella insurance policy kicks in when your other liability underlying limits have been reached. In other words, an umbrella policy can protect you when your automobile or homeowners liability insurance is not enough.

Keep in mind that an umbrella policy requires you to have a specific amount of underlying coverage on all other policies. In most states, you will need to have a homeowners policy with a minimum of $300,000 in personal liability coverage, plus an auto policy with limits of $250,000 or $500,000 for bodily injury coverage and $100,000 for property damage coverage and uninsured motorist coverage.

When an insured has a liability claim, they are covered up to their underlying policy limits, but any additional amount will be covered by the umbrella policy. The policy can protect future income as well as possibly cover legal fees. For example, if you have a car accident and your current auto policy has liability limits of $300,000 but the claim is $500,000, your personal assets would be at stake for $200,000 if you have no umbrella policy.

Or, if you are required to have $300,000 worth of liability on your homeowners or car insurance but only have $100,000, but you have a $2 million umbrella policy, you will still be liable for the “doughnut hole” of $200,000 before the umbrella will start paying. 

The required limits for underlying policies can vary by insurer, so it's important that you speak with your insurance agent regarding the limits on your primary policies, and determine how they correlate with the umbrella coverage you are considering purchasing.

How is excess liability coverage different from umbrella insurance?

Although you can get excess liability coverage on an existing policy, the main difference between excess liability and an umbrella policy is that the umbrella extends to automobile or other broader protections.

For example, if you only have excess liability on your homeowners policy and then you have a car accident, the excess liability policy on your home will not cover the additional liability for your car accident.

Umbrella coverage can also extend to other vehicles, boats, personal injury or director/officer liability, depending on the policy. Also, umbrella policies tend to be more cost-effective, because you can spend less on coverage but receive greater insurance protection.

Do I need an umbrella policy?

If you are a high net worth individual — generally someone with $1 million or more in liquid financial assets — or are exposed to more than normal risk, it makes sense to look into this coverage.

  • Do you spend a lot of time driving?
  • Do you have a boat or RV?
  • Do you entertain frequently in your home?
  • Do you have a pool?
  • Pets?
  • Do you have a vacation home?
  • Do you have teenagers who have just started driving?
  • Do you own a small business?

Umbrella liability is fairly inexpensive and can protect you and your property from lawsuits. If you have assets to protect in the event of a lawsuit, it makes sense to have this type of policy. The policy coverage amounts usually start around $1 million and cost around $150 to $300 per year. They are available in million-dollar increments – each additional million usually costs marginally less. Cost may vary by location, credit history and driving records of the people in your household.

Have you evaluated your current policy recently?

You may already have an umbrella policy in place but as assets grow over the years, you may need to consider raising the limits to cover your current exposure. In general, your policy should be equal to or greater than your net worth.

Note: We are not licensed P&C insurance agents and can only give you a broad overview of the advantages and disadvantages. Please discuss this with your agent before making any changes to your existing policies. 

About the Author

Roxanne Alexander, CFP®, CAIA, AIF®, ADPA®

Senior Financial Adviser, Evensky & Katz/Foldes Financial Wealth Management

Roxanne Alexander is a senior financial adviser with Evensky & Katz/Foldes Financial handling client analysis on investments, insurance, annuities, college planning and developing investment policies. Prior to this, she was a senior vice president at Evensky & Katz working with both individual and institutional clients. She has a bachelor’s in accounting and business management from the University of the West Indies, she received an MBA at the University of Miami in finance and investments.

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