Umbrella Liability Insurance
Updated: Jun 13, 2022
Many successful people don’t realize how underinsured they are, even if they have a great homeowners and auto policy.
Umbrella insurance (aka “excess liability insurance”) covers you above and beyond the limits of your auto, homeowners and watercraft insurance policies.
If you have teen drivers, a dog, a trampoline, domestic help or enjoy hosting large social gatherings – and you have a net worth above $300,000 – we urge you to consider an umbrella policy.
With today’s record high stock market and frothy home values, many of you have a much higher net worth than you think. That’s the good news. The bad news is you may be greatly underinsured and not doing nearly enough to protect the full value of your assets. That’s especially important if you are sued or if someone in your family causes damage to someone else or their property.
What is umbrella insurance?
In a nutshell, umbrella insurance (aka “excess liability insurance”) provides you with coverage above and beyond the limits of your auto, homeowners and/or watercraft insurance policies.
A typical homeowners policy has $300,000 of liability coverage. Suppose someone slips and falls on an icy walkway on your property. If they sue you for $500,000 in medical bills, the first $300,000 would be covered by your policy, but the other $200,000 would have to come out of your pocket. Ouch! A lifetime worth of careful savings can be gone in a flash if you don’t have sufficient protection. If you had an umbrella policy in place, that remaining $200,000 would also be covered.
Umbrella insurance kicks in when your “base” liability limits have been reached. Suppose you cause a car accident that results in severe injuries for multiple people? The medical bills are $450,000, which exceeds your $300,000 in liability auto insurance policy limits. Your umbrella insurance can cover the remaining $150,000. Further, let’s say one of the injured parties is a highly paid professional who cannot perform their job for six months because of the injuries. Because your car insurance liability limits are exhausted, without umbrella insurance your assets such as your house and savings could be at risk.
If you have assets worth more than $1 million or $2 million, I strongly urge you to look into an umbrella policy. Here’s why:
Your teenage child gets into a car accident, and the cost of injuries to other drivers is above your auto insurance liability limit. The person your child hit is a highly compensated physician or attorney who can’t work for six months. They sue for lost wages.
A houseguest falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.
Your dog bites someone. Dog bites are typically covered by a homeowners insurance policy. But if you’re sued for an amount above your home insurance liability limits (such as medical bills and pain and suffering), your umbrella policy would start paying.
You drive your car into a building. It happens–someone is parked close to a convenience store, and they put the car in drive rather than reverse, causing extensive building damage. An auto insurance policy would pay for the property damage first, followed by an umbrella policy.
Your son accidentally throws a baseball into someone’s face, causing extensive injury and a large stack of medical bills. Your homeowners liability insurance will pay first, followed by umbrella insurance.
Umbrella policies are surprisingly affordable
You typically pay about $300 a year for a $1 million policy and then roughly $100 to $150 per additional million of coverage. So, you can easily obtain $5 million in umbrella coverage for less than $1,000 a year ($80 a month). Isn’t that worth preserving your peace of mind?
Who should have umbrella liability policy?
Umbrella policies are best suited for people with a net worth of more than $300,000 – the typical coverage amount of a homeowners or auto policy. And certainly, if your net worth exceeds $1 million, since you are particularly vulnerable to lawsuits and unscrupulous creditors.
Your chances of being sued are also higher if you:
You have a swimming pool, pond or trampoline on your property.
You have dogs, horses or other large animals.
You have teenage drivers (and live in an affluent zip code)
You manage a family trust.
You host large parties in your home.
You employ household staff.
You have a high public profile.
How do you get it?
You can get umbrella insurance from most property and casualty provider. Just call your agent from your existing home, auto or watercraft policies. Plus, you will probably get a bundling discount. You don’t need to go out and find an umbrella liability specialist. Most reputable carriers that bundle, will also make sure you have no gaps between your homeowners (or auto) and your umbrella.
NOTE: In order to get an umbrella liability policy of any amount, you will need to have a homeowners and auto policy in place
How much coverage do you need? You should purchase umbrella insurance if the total value of your assets, including bank accounts, retirement accounts, college investment accounts, brokerage accounts and home equity is greater than the limits of your auto or homeowners liability.
EXAMPLE: Suppose your net worth (including home equity) is $1.8 million and the limits of your auto or homeowners policy is $300,00, then I would recommend getting a $2 million umbrella liability policy. Again, we’re talking about hundreds (not thousands) of dollars a year, unless you have extenuating circumstances such as teenage drivers with a lot of points and claims on their record already.
NOTE: If you have more than $5 million in assets you will likely need to consult with a specialty carrier in order to obtain a sufficiently large umbrella policy. We can help you with that.
How does umbrella liability insurance fit into your overall financial plan?
With an umbrella policy, all of your assets must be considered and protected. The other thing I like umbrella liability policies is that insurance companies don’t like to pay out big claims. If you are sued, the insurance company that has your umbrella policy will fight very hard on your behalf to reduce the amount you are being sued for. Think about how much this is saving you in legal fees.
Conclusion Novi Wealth Partners is a fee-only financial planning firm. We do not sell insurance, but believe that it is an important topic to discuss when considering your financial goals. If you or someone close to you has concerns about your liability coverage, please don’t hesitate to reach out. We’re happy to help.
RYAN A. DUNN, CFP®, Wealth Manager at Novi Wealth