Over the past few weeks, I have discussed the importance of having adequate homeowner’s and auto insurance. However, even the maximum coverage under each policy may not be sufficient if you get involved in a serious liability case. Fortunately, there is an excellent and inexpensive solution to this problem. A Personal Umbrella policy is designed to pick up where your homeowner’s and auto polices leave off and increases your protection by $1,000,000 or more. Here’s how it works.
The Personal Umbrella policy has a very large deductible, often $300,000 or $500,000. To satisfy this large deductible, you must raise the underlying limits of both your homeowner’s and auto coverage. For example, if your homeowner’s and auto coverage both had $100,000 limits for liability, and the umbrella policy had a $500,000 deductible, you must raise your homeowner’s and auto liability limits to $500,000. Let’s say you are at fault in a car accident that severely injures another person and that person is awarded a $1.2 million judgment. Your basic auto policy would cover the first $500,000 while your umbrella policy would cover the remaining $700,000. In fact, you now have $1,500,000 of total coverage: $500,000 of basic coverage plus $1,000,000 of umbrella coverage.
The cost for this coverage is very affordable, given the peace of mind it provides. A $1,000,000 umbrella policy can cost as little as $150 per year. “Factors influencing the premiums include number of cars, homes, youthful operators, pools, ATV’s, boats and the driving record of the operators,” says Ben Jackson of Sevier, Fowlkes & Jackson Insurance, a division of Compass Insurance Agency, Inc.
Many people erroneously believe that they are ‘suit-proof’ because they have few assets. In fact some newly-minted physicians take this position because their student loans place them squarely in negative net worth territory. However, a judgment can be held until you become successful or your future earnings could be garnished. Therefore, unless you are committed to a life of financial destitution, you should consider having an umbrella policy.
How much coverage should you have? Most people should have at least the minimum $1,000,000 umbrella policy. For our clients who have begun to accumulate considerable assets, we quickly increase the coverage to a range from $2 million to $5 million. The cost of higher coverage runs less than $1,000 per year.
A real life example: A good friend and client’s car hit a patch of ice and slid into the oncoming lane causing a head-on collision. Two passengers in the other car were not wearing seatbelts; both went through the windshield, receiving severe facial lacerations requiring extensive plastic surgery. They sued and received a mid six-figure settlement. Fortunately, my client had an umbrella policy which covered the settlement. Otherwise, his personal assets would have been at risk.
Finally, it’s worth remembering that a personal umbrella policy insures many situations that are not covered under the typical homeowner’s and auto policy including extended coverage for defense costs, slander, rental cars, play-toy rentals such as jet skis and boats, non-profit work and pollution. Also, I recommend buying your umbrella policy from the same company as your homeowners and auto policy to make certain there is no gap in coverage.
Stewart H. Welch, III, CFP, AEP, has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Consult your financial advisor before acting on this advice.