An Issue of Insurance: Why You Need an Umbrella Policy

I’ve recently met with and had conversations with several people about one of the most basic types of insurance; an umbrella policy. Sometimes called an additional liability policy.

One day, two conversations were with men in their 50s. During our conversation we agreed they’d gone too long without this arguably necessary coverage. Why hadn’t they been told?

An umbrella policy essentially adds additional liability coverage over the top (thus umbrella) of your other insurance policies namely auto and homeowners. If your auto coverage has only $500,000 of liability coverage and you wish to have more, you basically have two choices; add more to your auto policy or add an umbrella policy. You’ll find the umbrella liability coverage option to usually be less costly that adding liability coverage to your auto. With the umbrella option, you’ll have the added savings of not having to add liability coverage to your homeowner’s policy.

Another day was with two new clients as I conducted my initial comprehensive insurance review. Upon noting their lack of an umbrella policy, they asked me why their current insurance professional didn’t recommend one. “That,” I said, “is a question for your insurance professional. I don’t sell insurance; I point out the need.”

The premium cost may be the reason their insurance agent didn’t recommend one. However, that argument doesn’t work with me. I mean, as an insurance agent, your job is to point out possible risks and options to deal with that risk. Self-insurance may be your final choice. But, someone should make you aware of the risk you are assuming.

It’s usually said that the policy is for when someone (a guest that may have had too much of a good time) slips on your walkway leaving your weekend block party. However, liability coverage is more likely to be needed for risks you assume while driving.

My friend in northern Virginia needed their umbrella policy a few years ago. It was an auto accident that resulted in five cars being damaged. The total damage exceeded the auto policy’s property damage limits. The umbrella, as designed, paid for the rest of the repairs. If my friend didn’t have the additional insurance, they would have been on the hook (liable) for the repairs above the $50k limit of their underlying auto policy.

Now you may be asking, I can’t be sued, I don’t have any money. You can bet that when you are liable for damage you’ve caused to someone’s property or body (think how much emergency medical care costs), you will pay—even if you pay with future wages and earnings. The court may attach your future earnings or pension or social security income.

My third guiding money principle states, “If you are not willing or capable of taking risk, it is prudent to transfer risk to another.” I generally recommend my clients have at least a $2MM policy. You see, umbrella policies are sold in $1MM increments. A general rule of thumb is to have at least $1MM and then consider more depending upon your financial worth. Wealthier people have more to lose and therefore should consider more insurance.

My experience shows insurance companies start to get serious and ask more questions when selling policies at or above $5MM. It is normal for them to issue policies that are in similar value to their total worth. Consider that.

These policies aren’t expensive. And, as your risk increases so do the premiums. What is a risk for the insurance company? Vicious dogs, second and/or rental homes, swimming pools on property, watercraft, one or more teenage drivers, etc… You get the idea. We run risky lives. No matter how careful we are, accidents happen. Be prepared for it.

Take care now,
Dan