Headline: Don’t let one Storm Leave you Soaked.
Date: 11/17/2020
Body: Rain. Too little and crops don’t grow. Too much, and there are landslides and massive flooding. Your financial life can be similar in some ways, and that is why you should consider getting an umbrella insurance policy. There is a great article on this topic written by Kiplinger’s, and the link follows https://www.kiplinger.com/personal-finance/insurance/umbrella-insurance/601650/what-is-umbrella-insurance-and-do-i-need-it
What is an umbrella insurance policy?
Umbrella insurance is a flavor of personal liability insurance that “steps in” if your have a claim against you that can’t be covered by your other liability insurances. It will cover things like libel and slander. If you are a landlord, this insurance can protect you from claims filed by your tenants. Upwards of $1,000,000 of coverage can cost you only $150-$300 per year. Be aware: the umbrella coverage will only kick in if you have also maintained sufficient primary insurance on your car or home.
Interestingly, an umbrella policy can also be used to pay for your legal expenses in a liability suit. So, if you lose, it would pay for the judgement against you and the legal fees. (Please note that it you DO lose, the judgement will likely also include a portion against future earnings, and the umbrella coverage would also shield these future earnings. If you win, I umbrella liability coverage could also be used to pay for your legal fees.
Further those people who are on a board of directors for any company should get Directors and Officers Insurance (D&O), and the umbrella policy interacts with this coverage. If a person is a consultant of any type, and has obtained Errors and Omissions Insurance (E&O), the umbrella policy will act to backstop this policy as well.
Some people are wrong about what it is
Some people think that the umbrella policy is the same as “excess liability insurance” and it is not the same at all. For example, you might opt for “excess liability insurance” for your car. So, if you get into an accident, the other person’s medical costs will not bankrupt you. But, excess liability insurance will not protect you from any slander or defamation suits that were related to the accident.
What is NOT covered by the umbrella insurance policy?
The umbrella policy will not cover your own personal injury or liability arising from breach of contract. Also, please make note that these policies often exclude boats. It should also make one feel better that assets that are inside an employer-sponsored retirement account like a 401(k) or a 403(b) are often shielded from civil liability under ERISA of 1974. Further, the value of your house will often be excluded from your wealth calculation under the homestead exemption. The level of exemption depends largely upon state law.
Who should consider this coverage?
You should consider this coverage if you have significant assets to protect. (For instance, if you have a house, a car collection or other assets.) Also, people who are responsible for others (e.g. coaches) should consider this insurance. There are also some other situations (that I didn’t even think of) that could apply to broad swaths of society, that could lead to personal injury in a purely accidental manner. There are 8 common situations addressed by this article, where the consumer could benefit from an umbrella policy:
- If you have vacant landà and anybody gets hurt on your land, even if unintentional.
- You have “fun” vehicles like motorcycles or watercraftàWho knows what could happen if the friends of your children try out the vehicles and hurt themselves?
- You have an “attractive nuisance” like a treehouse or trampolineà If a neighbor’s kid gets hurt on these, it’s your money the parents come after.
- You drive a luxury car.
- A close family member shares volatile opinions online.–> What if your kid posts a provable libel on social media, and now you are on the hook.
- You rent out your propertyà If somebody gets hurt on your property and sues you for more than landlord insurance will cover, the umbrella policy covers you.
- You have a public profile of success and wealth.
How do I find the cash to pay for Another Insurance policy?
Many experts suggest that a good way to afford the umbrella policy is to increase the deductible on their car insurance. What? You might asik? Well, if you increase your deductible, you will be paying out-of-pocket for smaller conditions, but you will wind up saving much more on the monthly premium.
The Verdict
I would recommend umbrella insurance to anybody who has significant assets that they would want to shield from people looking for targets with potentially deep pockets to sue. The more obvious reasons to have this insurance are those who are landlords, but even homeowners might want to consider this very reasonable insurance.
Say you have a crew doing home improvements, and somebody slips on a ladder due partially to a defect in your home construction, you could be on the hook for being sued. But, if you had an umbrella insurance policy, this would cover everything your homeowners’ policy didn’t. This one incident could involve tens of thousands of dollars or more in medical expenses, lost wages… the list goes on.
So, I guess the advice might be to consider this insurance, and have a series of conversations with your partner, and decide together whether or not you have the financial need to protect your assets with this very cost-efficient insurance policy.
REFERENCES
How Umbrella Insurance Works (investopedia.com)
Umbrella Insurance: What Does It Cover? – NerdWallet
Best Umbrella Insurance Options of 2021 (thebalance.com)
Umbrella Insurance Policy | Personal Umbrella Policy | The Hartford
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.