An Umbrella What?

By: AnnaMarie Mock, CFP®

Protecting yourself and your family is top priority for most, and households purchase different types of insurance to ensure that they are properly covered from unforeseen events.

A very important form of insurance that people frequently overlook is Excess Personal Liability, which is commonly referred to as Umbrella insurance. Umbrella insurance provides additional liability coverage above the limits established through other basic liability policies like auto and homeowner’s/renter’s. Umbrella insurance is designed to help guard against large and potentially devastating liability claims or judgments caused from bodily injury, property damage, lawsuits, libel, and slander.

Umbrella coverage will only take affect when your underlying liability limits through other forms of insurance are exhausted. As a result, many insurers require an initial liability coverage amount between $250,000 and $500,000 on your vehicle and home before implementing an umbrella policy.

You may be remarking to yourself that $500,000 of liability coverage is sufficient. Reflect on the following scenario: You are at fault in an automobile accident that severely injured the other driver and prohibits them from working for an extend period of time. The other driver sues to recoup lost wages and medical bills which total to $1 million. Through your auto policy, you have bodily injury and property damage coverage up to $500,000 in place. Where will the remaining $500,000 in damages come from?

Without an umbrella policy, the difference between the damages and liability coverage is your responsibility. If you don’t have the cash to cover that difference, your assets and future earnings can potentially be used to meet the outstanding liability due.

However, with an Umbrella policy, your insurance company provides the additional coverage needed to meet the remaining liability ($500,000). Therefore, umbrella insurance can help ensure that your personal assets and future earnings are not at risk in the case of an accident.

Umbrella policies are available in million dollar increments and are relatively inexpensive for the value they provide. There are several factors to consider when selecting the appropriate amount of coverage:

1. Everyday risks: Do you have any risks as a homeowner or renter? Do you commute to work? Do you participate in potentially dangerous activities? If you answer yes to any of these questions, purchasing umbrella insurance could be a wise move.

2. Value of your assets: What is the aggregate value of your properties, possessions, investment accounts, savings, and business? Generally, the more assets you have, the higher the umbrella policy limit should be.

3. Loss of future income: Liability lawsuits can result in loss of both current assets and future income which would have long term ramifications on your financial well-being.

While an umbrella policy is not required, it is recommended as a complement to your existing insurance because of the increased protection. If you have any questions about Umbrella policies or selecting an appropriate coverage amount, please contact a member of the HIGHLAND team.