Umbrella coverage: should you have coverage?

 

Insurance coverage is a vital part of financial planning. When most people think of insurance they envision life insurance, auto coverage, homeowners or even in some cases long term care coverage. However, one of the most overlooked and reasonably inexpensive insurance is that of umbrella insurance.  

An umbrella policy is a form of insurance that is designed to cover excess liability over and above the policy limits of a traditional insurance policy. When an insured individual is held liable, the initial insurance policy would serve as the primary coverage. Should the liability exceed those limits, the umbrella coverage would then activate to cover the additional liability.

In most cases the umbrella coverage is there to essentially backstop either your homeowners insurance or your auto coverage, as those are the primary policies which shield you from personal liability. 

Many people may not have thought about the need for such coverage, while others may have considered it and then dismissed it.   It is important to consider the many circumstances in which such a liability may occur. As an example, you may be an extremely responsible individual who has never been held liable for anything in the past. However, accidents can and do happen. What happens if you have an auto accident and killed or permanently maimed a young surgeon that just completed medical school who happens to be married with several children? One of the things that can and likely will be considered is the lost earning power of the individual, and the impact to his family. Many auto policies only carry 300k-500k dollars in liability coverage. In such a scenario, if you are sued above your policy limits, your personal assets may be in jeopardy.

Perhaps you are someone who is so confident in your ability to avoid an accident, you still choose to dismiss such coverage. But what happens when your spouse, or even your teenage children are behind the wheel of a vehicle? If that child or spouse is in a similar circumstance, their liability will become your liability.  

Although more than 80% of umbrella policy claims paid tend to be related to auto incidents, not every liability has to occur behind the wheel of a vehicle. In some cases you can experience significant liability in your own home. A delivery man can slip on the walk way to your front door and opt to take legal action for a fall he sustained. Possibly your dog could have bitten a neighbor. Or one of your children had a friend over the house for a swim, and they accidentally drowned in the pool.  

While none of these are pleasant thoughts, and some are downright horrific, that is the nature of insurance. It exists to make us “whole” in a financial sense in the face of an unpredictable event.   The types of events that trigger such liabilities are never pleasant experiences.

The possible list of liabilities that exist are endless. Fortunately the cost of an umbrella policy is typically fairly reasonable, and among the less expensive policy premiums paid throughout the year. It is not uncommon for an umbrella policy to be issued for just $300-$400 a year for as much a $1 million in excess liability coverage. Policy premiums can be affected by a number of variables, such as where you live, how many drivers live there, and your prior history.

In some cases if the increased insurance premium is problematic, it might be wise to raise your deductible on your basic policies to help offset the additional policy premiums.    

The amount of coverage necessary depends on various factors. How much you earn is a consideration. Also, what your net worth is would be a significant variable in determining coverage. In some cases a 1 million dollar policy may be more than sufficient. In other cases it may be prudent to take on significantly more coverage.  

It is also important to note that an umbrella policy is typically not going to cover you for any liability incurred in the course of conducting your work. These policies that are issued to insure personal liability will not cover you for a commercial liability, and should not be viewed as a substitute for commercial insurance.

It is generally wise to consult with your financial advisor as well as your property and casualty insurance agent to discuss the adequate amount of coverage that is suitable.  

Joe Favorito

Joe Favorito

Joseph Favorito is a Certified Financial Planner™ who began his career in the financial services field in 1997. Over the past two decades Joseph has worked for several New York stock exchange members. In 2011 he founded Landmark Wealth Management, LLC , a Long Island-based Securities Exchange Commission registered investment advisory firm.

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