When we think about insurance coverage, we typically focus on life, disability, auto, and homeowners’ or renters’ insurance due to their direct impact on our day-to-day lives. However, we often miss another critical type of coverage: umbrella insurance. This kind of policy provides an additional layer of protection for when your standard insurance coverage might fall short, such as safeguarding you against the extra costs of claims and lawsuits. In this post, we’ll explore what umbrella insurance is and when it makes sense to get it.
What Is Umbrella Insurance?
Umbrella insurance is essentially a bigger safety net that goes beyond your existing insurance policies. The amount of coverage is typically somewhere from $1 million to $3 million. Umbrella insurance kicks into action when the personal liability limits of your existing policies (like home or auto insurance) are reached (usually around $500,000). Umbrella insurance will then cover the excess costs that could otherwise wipe out your assets. Think of umbrella coverage as an additional layer of armor, protecting your overall wealth in the event someone sues you for every penny you’re worth.
When Would You Need Umbrella Insurance?
In comprehensive financial planning, protecting your assets against potential threats is just as vital as estate or investment planning. If the total of your assets (including cash, investment portfolio, and real estate) significantly exceeds the liability coverage limits of your auto and homeowners’ insurance policies, purchasing umbrella insurance becomes an important consideration for safeguarding financial future.Here are some real-world examples of when umbrella coverage would come in handy:
- Significant At-Fault Auto Accident: Imagine you’re involved in a serious car accident, and it’s determined you’re at fault. The medical bills, vehicle repairs, and potential legal fees of the other party quickly surpass your auto insurance’s liability limits. Without umbrella insurance, you’d be responsible for paying the remaining balance out-of-pocket, which could be financially devastating.
- Accidental Injuries on Your Property: Let’s say a guest or a delivery person has a severe fall on your property, leading to substantial medical bills, loss of income, and maybe even a lawsuit for damages. Again, an umbrella policy will protect your savings and assets from being targeted.
- Landlord Liabilities: If you own rental property, you’re exposed to additional risks. If a tenant or one of their guests is injured on your property and claim that negligence on your part contributed to the incident, you could be facing a significant lawsuit. Umbrella insurance can offer an extra layer of protection beyond what your landlord policy covers.
- Recreational Accidents: Owning recreational equipment like boats, jet skis, or ATVs can be fun, but they also expose you to liability risks. If someone is injured while using your equipment or on your property, a lawsuit could happen.
Why it's More than Just an Umbrella
It’s essential to understand that umbrella insurance doesn’t just provide financial coverage; it also provides peace of mind in three main ways:
- Comprehensive Coverage: It fills the gaps left by other insurances, providing a safety net that catches a wider range of potential risks.
- Asset Protection: For individuals with significant assets (more than what your typical liability insurance covers), umbrella insurance shields those assets.
- Affordability: Even though umbrella policies cover you for millions, it usually costs only a few hundred dollars per year (typically starting at $200/year for $1 million of coverage), making it a surprisingly affordable and wise investment in your financial security.
In the grand scheme of things, umbrella insurance is the ultimate testament to the adage, “Better safe than sorry.” It’s about being prepared for the very unlikely, absolute worst case scenario. Umbrella insurance isn’t necessary for everyone. Again, it only makes sense when your assets are significantly larger than your basic liability coverage provided by your auto and/or homeowners’ insurance policies. If umbrella insurance does make sense for you, it’s a relatively small cost to ensure you’re prepared for the unexpected.
Brandon Tacconelli is the Director of Client Care at Thinking Big Financial, Inc. Thinking Big is a fee-only financial planning firm in New York City specializing in working with the LGBTQ+ Community.