Umbrella Insurance Policies: Considerations and Coverage
For many high-net-worth individuals, standard insurance products may not go far enough.
For example, if the well-paid CEO of a biotech firm causes a car accident, the victim may very well decide that a routine insurance payout is not enough, and they might opt to sue the CEO instead. If the CEO was careless when they were driving and owns expensive assets, a judge or jury might ultimately decide that the victim is due a fairly large settlement.
To reduce liability in these kinds of scenarios, many wealthy individuals may choose to purchase umbrella insurance on top of their other insurance policies.
What Is Umbrella Insurance?
Umbrella insurance is a type of supplemental insurance that protects the insured against liabilities that exceed the coverage they have in their existing homeowners and auto policies. Most regular insurance policies don’t have coverage for “personal injury” claims; umbrella insurance can provide that extra liability coverage.
Essentially, umbrella insurance may secure the assets of high-net-worth individuals by reducing their exposure to lawsuits and other financial penalties in the event that they get sued for damaging other people’s property or causing an injury. Umbrella insurance policies can also protect the insured against slander, libel, vandalism, and the invasion of privacy, among other things.
Simply put, umbrella insurance may give you the peace of mind that comes with knowing that your assets are secure in the unlikely event that you get sued in excess of what your existing insurance policies would cover.
For example, a homeowner’s insurance policy might protect them with up to $500,000 if someone suffers an injury on their property. But if a serious accident happens, the insured might find out the hard way that the $500,000 isn’t as much as it seems.
Enter umbrella insurance, which is generally cheaper than other insurance products and can provide up to $10 million in coverage.
Considerations for Deciding Whether You Need Umbrella Insurance
Unlike homeowners insurance and car insurance, umbrella insurance is never required. Think of it as a nice-to-have—something you will, no doubt, be thrilled to be able to turn to if you ever need it.
There are a number of reasons you might decide to take out umbrella insurance.
For starters, folks who own property or have a lot of money or other assets might want to take out an umbrella policy simply to protect their wealth. If you have things that could lead to injuries at your home—such as a trampoline, a pool, recreational vehicles, or a river—a personal umbrella insurance policy might make it easier to sleep at night.
The same applies if you own dangerous animals, certain breeds of dogs, or horses on your property. Umbrella insurance can also protect you against other kinds of plausible accidents—such as a guest falling down the stairs at your house and breaking their neck.
Beyond these considerations, you may also opt to take out umbrella insurance to protect yourself from lawsuits if you coach sports, volunteer at local nonprofits, are a landlord with a rental property, or engage in physical activities in which you might injure other people (e.g., hunting or skiing).
Umbrella insurance can also cover you in the event that your underage child crashes a car into a building and you’re faced with exorbitant medical bills, your favorite student mixes the wrong chemicals in class and accidentally burns another classmate, or your kid seriously injures someone while playing sports.
It’ll also protect you in a scenario like this: An insured couple hosted a beach party for their daughter, someone there found a propane tank they thought was empty and threw it on a bonfire, the tank exploded, several people got injured, and a $20 million lawsuit was filed.
Many people also decide to get umbrella insurance when they inherit money and it truly changes the game. If your income is rising and your assets are appreciating, it might make sense to look into umbrella policies.
Despite all of these reasons for umbrella insurance, there are a number of wealthy individuals who either don’t have umbrella insurance at all or, if they do, don’t have enough coverage.
What Isn't Covered by Umbrella Insurance?
Although umbrella insurance provides additional coverage for liabilities and injuries, it may not get you off the hook in every scenario.
For example, if you’re a doctor and get sued for malpractice, umbrella insurance won’t apply. You also won’t be covered for criminal behavior. If you were the person who pushed the guest down the stairs at your house, umbrella insurance wouldn’t cover you.
Beyond that, umbrella insurance won’t cover any liabilities you might incur in the scope of contractual agreements. If you hire a painter to paint your house, you sign a contract, and that person falls off your roof and gets injured, an umbrella policy might not cover you.
What Does Umbrella Insurance Do?
Add it all up, and umbrella insurance goes above and beyond the run-of-the-mill insurance products—such as homeowners, car, and life insurance. In a litigious state such as California, this additional coverage can be quite valuable. If you’re like most people, the last thing you want is to work hard your whole life and build a financial plan that helps you prepare for the future, only to have someone snatch it all away from you in court after an unexpected accident happens.
Let’s say you’re a high-net-worth individual, and you have a 16-year-old son. You’re out of town on business, and your spouse is at work. It’s a nice summer day, and your son—whom you’ve been teaching how to drive for the last few weeks—sees your beautiful BMW sitting in the garage.
He knows where the keys are, decides to take the car for a spin, and picks up his girlfriend who lives across town. Once she’s in the car, the two go on a joyride. But your son takes a corner too fast, loses control of the car, and crashes into a tree. Your son makes it out of the accident OK, but his girlfriend is seriously injured. She needs to be in the hospital for a month, she won’t be able to walk again, and her family sues yours to cover the physical and emotional damages.
Now imagine that the lawsuit is decided against you to the tune of more than you’re worth! You could lose everything. And if you can’t pay the full sum, the judge might even decide to garnish your future wages and take any future inheritance you might receive until you can settle the claim.
It might seem like an unfair scenario, but it’s an illustration of the types of lawsuits that have played out in the real world. With a healthy umbrella policy in place, your assets may be protected in the event that you find yourself in a comparable situation.
How Does Umbrella Insurance Work?
According to the Insurance Information Institute, a $1 million umbrella policy will typically set you back $150-$300 each year. Generally speaking, coverage increases in million-dollar increments, and each additional tier of coverage will set you back an extra $100 a year. For the most part, umbrella insurance will be issued only by the same company that issues your homeowners insurance or auto policy. So if you’re thinking about getting umbrella insurance, you may want to contact your agent and see what they can do.
Not sure how much coverage you need under your umbrella policy? A good rule of thumb is to start out by covering your net worth first.
Then, as time goes on, your investments appreciate, and your salary increases, you may want to consider enhancing your umbrella policy by moving to the next million-dollar increment.
If you don’t know where to get started with umbrella insurance—or have questions about insurance in general—a conversation with a financial advisor may be particularly helpful. For example, at EP Wealth, we have great relationships and partnerships with many insurance companies, and we have a bird’s-eye view of the entire insurance landscape.
To illustrate, we know that the folks at Chubb offer a homeowners policy that goes above and beyond most regular homeowners insurance coverage. If your house is lost in a covered event, Chubb will pay to have your home rebuilt and repaired to the condition it was in before the event—even if the cost is more than your policy covers!
In a similar vein, Chubb offers wildfire mitigation services to customers who live in vulnerable areas, such as California. If a wildfire threatens your home and you have this coverage, you’ll get access to a team of private firefighters who will do what they can to save your house when the fire is encroaching on it. As fires have raged through California’s forests in recent years, it comes as no surprise that more and more homeowners are opting for this coverage.
When it comes to insurance, everyone’s needs are different. Contact us today if you’re looking to evaluate your net worth as well as your financial plan and talk more about umbrella insurance, whether you need it, and which brokers might be most helpful for your unique circumstances. Here’s to getting the coverage you need to protect your wealth.
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