Previously, we have talked about why umbrella insurance is the policy that most people should consider. We live in a society where lawsuits are commonplace. A personal umbrella policy helps pay for legal fees, medical bills, lost wages, pain and suffering, settlement expenses, and other things you could be liable for in the event of a lawsuit or at-fault incident.
Investopedia defines it like this: “It’s the low-cost way to get significant extra liability coverage.” The part of that definition I like is “low cost.” It is extremely inexpensive yet very powerful.
All of us are walking “liabilities.” Any time we take an action in our society, there is a chance that this action could accidentally cause harm to someone else. Very few people are trying to hurt others, but accidents do occur. We work hard to provide for our families, build wealth, and leave a legacy. Sadly, the actions we take as we live our lives could inadvertently cause harm to others resulting in the transfer of wealth as a result of our liability.
I don’t know about you, but I don’t want my hard earned wealth to be awarded to someone else because of an accident. This is why we recommend umbrella insurance as one of the three insurance policies all people should consider.
Here are a few things for you to consider prior to moving forward with umbrella insurance.
Do You Qualify?
Umbrella insurance is a separate insurance policy that gives additional liability coverage on top of your existing auto and home/renters policies. Before an insurance carrier will consider giving you this additional coverage, they want to make sure you have maxed out your liability limit with your existing policies. In most cases, you are required to have the maximum liability limit on your auto insurance (known as “250/500”) and the maximum liability on your home or renters policy (commonly listed as $300,000 in liability).
How Much Do You Need?
Umbrella insurance is put together in increments of one million. So, the standard policy amounts are one million through five million dollars. Anything higher than this typically requires additional information to gain an understanding to why additional coverage is necessary.
One million dollars is a lot of money and coverage. Because umbrella insurance is inexpensive, just a few hundred a year can get millions of dollars of additional liability insurance coverage.
So which of these million dollar policies is right for you? Following these three steps will help make your decision:
1. Evaluate your assets.
If you were found liable and a transfer of wealth was required to make someone whole, how much wealth could get transferred? This goes beyond the money in your bank account. What is your total NET worth? How much do you have in your retirement accounts? How much is your home worth? How much personal property or other possessions do you have? And what is the value of your future income earning potential?
These are some of the things that will be considered when understanding how much of your wealth would be awarded to another party as a result of an accident.
2. Evaluate your exposure.
Above I mentioned that we are walking liabilities. Are some of your daily actions exposed to potential accidents? Sure, you should consider your job and other leisure activities, but you should also consider things like how long your commute is and how often you host people at your home.
3. Evaluate your comfort level.
At Stewardship we often repeat “personal finances should be personal.” This is especially true when it comes to selecting an umbrella insurance policy. Maybe the minimum $1 million coverage doesn’t feel like enough. So, increasing it to $2 million or $3 million may provide additional comfort. Although lawsuits and actions resulting in liability are commonplace, only you know your risk tolerance.
Some unwisely think umbrella insurance is not necessary and others unwisely think they need hundreds of millions in coverage. We believe most people fall in between those two extremes, and advies all US adult citizens to consider because it is an inexpensive insurance that covers a lot!
If you would like information on how much an umbrella insurance policy costs, schedule an appointment with our wise advisor, Brandon Ream below!