As a personal insurance advisor, few things puzzle me more than people passing up excess liability coverage or the “umbrella” policy. It is by far the most affordable coverage you can purchase, often costing less than a few hundred dollars per million of coverage. More importantly, this coverage is a major form of personal asset protection and can become an unbelievable source of comfort if you find yourself in a catastrophic situation. Why then do so few of us actually have excess liability coverage?
Oftentimes, customers don’t know exactly what benefits the umbrella policy provides. In fact, only about 20% of homeowners carry an umbrella policy1. Many that do are sold a $1 million policy though their assets and earnings greatly exceed that number. What makes this coverage such an enigma?
Understanding “personal umbrella” coverage
Your home and auto insurance policies, as well as your boat, ATV, snowmobile and motorcycle insurance policies, provide liability coverage to protect you in case you are responsible for an accident and end up in court. Depending on the severity of the accident, the liability limits on that underlying policy may not be enough. This is where an umbrella policy comes into play. The umbrella policy provides additional liability coverage and will also cover attorney and court fees, which can be significant.
Why are adoption rates low?
Knowing all of the advantages of this coverage, it would seem that more people would have an umbrella policy. However, there are some factors that stand in the way. The primary obstacle is that umbrella insurance is not a requirement. Auto insurance (at least the liability portion) is required throughout the country. Home insurance is not a state requirement but if you have a mortgage (which most homeowners do), it is required by the mortgage company. As a result, auto insurance and home insurance policies are often purchased at the time when proof of coverage is required (such home closing, renewing tabs or purchasing a new car). If your insurance advisor doesn’t incorporate umbrella coverage into your annual review process, you may be missing an important piece of your asset protection plan. Even if advisors do make the case, consumers don’t feel the urgency to make the purchase because it is not required, and they are often very wary about being “upsold.”
Assessing your risk
We all have liability risks that are a part of our everyday life, but some increase our exposure more than others. Think about the following questions:
Do you own a boat, snowmobile or four-wheeler?
Do you have a swimming pool, hot tub or trampoline in your yard?
Are you a hunter or do you own a gun or gun collection?
Do you own any dogs, horses or other pets?
Do you have any unfinished home maintenance (loose railings, tree limbs, a broken or slippery sidewalk)?
Are you connected to the internet and does your family have cell phones?
Do you own an automobile?
You likely answered “yes” to at least a few questions, and while these activities bring a tremendous amount of enjoyment to life, it is important to recognize that all of them have also led to lawsuits with damages that ranged from $500,000 to $2 million.
Determining your level of coverage
Once the need has been demonstrated, you will need to determine the right level of coverage. With assistance from your financial advisor, you should make a calculation of the value of your assets. Assets can be money in the bank, investments (sometimes even retirement accounts), as well as possessions like your home, cars and personal belongings. You should also look at your current earnings and future earnings potential. That number should be the base level of umbrella liability coverage purchased. As mentioned before, an umbrella policy is extremely affordable. A $1 million personal umbrella policy can cost as little as $125 to $200 a year depending on your specific risks.
An added bonus is that many insurance companies provide a discount on home and auto insurance if you purchase an umbrella policy, which offsets some of the costs and increases its affordability. These policies can be added at any time and often have very few requirements besides having adequate underlying coverage on the home and vehicle policies. In today’s world, we’re often exposed to risk, and anyone can get hit with a lawsuit. That’s why it’s more important than ever to consider an added layer of protection for your assets – and your peace of mind.