Accidents happen: Are you covered?
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If a visitor falls at your home, will your insurance cover all the costs? It depends. Your homeowner and auto policies provide liability coverage, but if it isn’t enough, you may be stuck. A large liability judgement could jeopardize the financial security of your family. What can you do?
Have you considered the importance of obtaining umbrella liability insurance? Many times, umbrella coverage is overlooked. Unlike homeowner, auto, and health insurance, umbrella policies are not required by law. However, this does not make umbrella liability coverage any less important. The best part is that umbrella coverage is cost-effective and relatively inexpensive!
What is Umbrella Liability Insurance?
Umbrella liability insurance is an extension of homeowner, renter, and auto insurance liability coverage that protects your assets from major claims and lawsuits. Once limits have been reached on your underlying liability coverage, an umbrella policy provides additional protection to safeguard your assets.
Without an umbrella policy, the costs incurred after your homeowner, renter, or auto policies are depleted must be paid out of your pocket.
The two main hazards that umbrella liability coverage protects against are bodily injury and property damage. Once your homeowner liability limits have been exhausted, an umbrella policy would cover the medical bills of an individual who sustained an injury due to your dog biting him or her. Or, if you were at fault in a car accident and your auto policy liability coverage was not sufficient to pay all the repairs on the other person’s vehicle, the umbrella policy would pick up the costs up to its limits.
If you are a landlord, an umbrella policy will provide the same types of coverage for your rental units.
In addition to bodily injury and property damage, umbrella liability insurance may pay for lawsuits as well as attorney and other legal expenses not covered by your homeowner, renter, or auto policy.
However, personal umbrella insurance does not cover liabilities associated with business activities, business property, or professional services.
Who Needs It?
The real question is, who doesn’t need umbrella liability insurance. Anyone who earns income and owns assets is an ideal candidate for this type of coverage. It is a low-cost way to protect assets from being liquidated to pay for damages to others and disastrous lawsuits that could happen to anyone, not just individuals with large amounts of wealth.
Umbrella insurance protects you, the insured, and any resident relatives of your household. It protects you in the United States and from liability anywhere in the world. For example, if your child was studying abroad and was at fault for causing an auto accident, your umbrella liability policy would provide coverage.
How Much Do You Need?
Determining the amount of umbrella liability coverage depends on various factors, including net worth, profession, geographical location, and hobbies.
If you are in a profession with high public exposure, you may be more likely to have a lawsuit brought against you. Or, if you enjoy competitive dirt biking, you may face more risk than someone who enjoys bike riding on local trails.
Since umbrella coverage begins when homeowners, renters, and auto policies are exhausted, an umbrella policy must meet certain limits.
For example, if your homeowner’s liability coverage limit is $500,000, your umbrella coverage must begin at $500,000. Any gap in coverage would cause you to have personal exposure. Generally, insurers will coordinate umbrella policy limits with your other policy limits to ensure gaps do not occur.
Typically, umbrella insurance policies provide $1 million to $2 million in additional coverage for an average cost of $380 per year though other factors can impact costs, such as location of where you live; total amount of coverage; and your risk profile. As a resident of Indiana, I just added a $1 million policy at a cost of $19/month. The minimal cost not only provides additional protection, but peace of mind.
As a preliminary guideline, you should consider umbrella coverage to match the value of your assets. Current and anticipated income should be a factor as well. If held responsible in a lawsuit, your payment for damages could be based on your current net worth as well as your future earnings. It is important to reassess your coverage every few years to adjust as appropriate.
Summary
Protecting you and your family from potential devastating liability and lawsuits is key. Talk with your financial advisor or insurance professional to determine if an umbrella policy is recommended for you.
Mathew Ryan, MBA, CFP, EA is a Financial Planning Specialist with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Mathew at mryan@bedelfinancial.com.