Do I Need Umbrella Insurance?

Accidents…. They happen all the time. Think your homeowners or car insurance can provide enough coverage to protect against lawsuits? Think again.

Chances are slim that you will lose a lawsuit for a sum greater than what your existing insurance will pay. But what if it did occur? It has happened before.

umbrella policy

Do you have enough coverage to protect your personal assets and ensure they are not touched? If you don’t, you could find yourself losing all your hard-earned money.

A great way to protect yourself from a situation like this is umbrella insurance.

What is Umbrella Insurance?

An umbrella policy is a type of personal liability insurance that is activated after your homeowners or auto insurance is fully exhausted. An umbrella policy sits on top of your auto and homeowner’s insurance policies meaning that the home or auto insurance is used up first then the umbrella policy kicks in if necessary.

Umbrella insurance covers not just the policyholder but other members of the family or household as well. If you’re worried about a neighbor getting hurt on your property, an umbrella policy can cover any medical bills that your homeowner’s insurance does not. 

Worried about your newly licensed kid getting into a car accident? An umbrella policy will allow you to sleep better at night knowing you’re covered in case your child is found liable in a car accident. An umbrella policy will cover the injured parties’ medical bills if your child was found liable in a car accident.

car accident protection

Another great advantage of an umbrella policy is that it acts as coverage above and beyond your homeowners and auto insurance. In fact, the incident does not have to involve your property or your vehicle for umbrella insurance to cover it. The coverage is also worldwide except the homes and cars owned in your home country is only covered under an umbrella policy.

Umbrella insurance even covers certain liability claims not typically covered under other policies such as libel, slander, defamation of character, and false imprisonment. It also can cover malicious prosecution, wrongful entry, invasion of privacy, and other hazards.

Another bonus: If you own rental property, umbrella insurance provides liability coverage beyond what renter’s insurance covers (nice! 😊)

What is Not Covered By An Umbrella Policy

As good as an umbrella policy is, it doesn’t cover you in every possible situation. Here are a few examples where an umbrella policy does not provide coverage:

  • Your personal injuries
  • Damage to your personal property
  • A criminal action or intentional action causing damage to someone else
  • Liability assumed under a contract

Examples of An Umbrella Policy in Action

Here are some examples of various everyday incidents that an umbrella policy can cover that is not totally covered by either homeowners or auto insurance:

  • Your dog attacks a neighbor who was out on a walk. Your neighbor sues you for medical bills, lost wages, and pain & suffering.
  • Your teenaged child throws a party while you are out of town. Someone brings alcohol to the party. Someone drives home from the party and gets arrested for DUI. Their parents sue you for wrongful endangerment and for not having an adult being home to supervise the party.
  • Your son gets into a fight at school and knocks someone out. The boy’s parents sue you.umbrella protect family

These are just a few everyday examples. There are literally hundreds of possibilities that could occur. I know… I know. You say to yourself, “My neighbors would NEVER sue me, we get along great” or “My daughter would NEVER throw a party with alcohol being present” ….. WRONG! If it can be conceived, it can be achieved so plan for the worst and hope for the best.

Now here is how an umbrella policy can help with these situations.

For example, let’s assume your son gets into an automobile accident and hits a pedestrian. Your son just happens to be driving your brand-new Lincoln Navigator, so the pedestrian decides to sue you for $1M.

Let’s assume your automobile insurance policy has a $250,000 liability coverage with a $2,000 deductible. What’s going to happen? If they win the lawsuit, you’ll end up cashing in other assets to cover the jury’s judgement.

Now let’s add an umbrella policy to the mix and see what happens. You can get an umbrella policy worth $1M with a $250,000 deductible REALLY cheap (i.e. about $15-25 / month).

If the pedestrian wins the $1M lawsuit, your auto insurance pays $250,000 and the umbrella policy pays $750,000.

Getting an umbrella policy protected the assets you have spent a lifetime building.

Want more reasons to get an umbrella policy? Here are a few more…….

You Plan To Retire With Teenagers at Home

Retirement…. The end goal of everyone’s professional life. Usually it’s a time to relax and enjoy the next phase of your life. Typically, most people have adult children or even grandchildren by this time. However, that is not always the case.

More frequently, as people are starting families well into their 30’s or even 40’s as well as people following FIRE (Financially Independent Retire Early), young and teenaged children may be at home when you decide to retire. Want examples…. I’m 1 of them! I was a freshman in high school when my dad decided to retire at the age of 65. True story.

Want another example? A friend of mine recently retired after 30+ years as a teacher. He has a 16-year old son still living at home.

The good thing about an umbrella policy is that it covers all members of your household. The more members of your family that leave the household on a regular basis, the higher the risk of an accident occurring.

Teenagers that drive put your family at significantly higher risk of liability. Not only are they inexperienced, but they sometimes experiment with alcohol, drugs, and other things that can impair their judgement.

Without an umbrella policy, these careless actions could potentially bankrupt you. Years of hard work acquiring a high net worth just went down the drain. It’s a no-brainer.

You Have Rental Property

Owning rental property can be a boom for your retirement income and can be an important element used to create your own pension.

A downside to owning rental property is that it opens you up to more risk. Accidents can happen on the property and people can get hurt. No matter how hard you screen your tenants or worked on the safety of your rental property, something could go wrong.

Maybe the property has faulty wiring, a water leak that causes black mold, or the sidewalk was not properly salted after a snowstorm.

umbrella protects rental property

Your tenants should have renter’s insurance and you should have homeowner’s insurance that covers most problems. However, you just never know what could happen beyond the scope of your insurance policies. An umbrella policy can fill the gaps not already covered.

You Are A Small Business Owner

Serving people can be a rewarding experience and bring a lot of joy to your life. From a financial perspective, serving people can also increase chances something bad might happen to you.

Let’s say, for example, that you own a restaurant on a bustling main street. Due to COVID, you open a tent outside your restaurant to serve your clients and keep them safe. The tents are located where cars used to park.

Then one day, a car crashes through the outdoor dining area and injures your patrons. One of the patrons has broken ribs and contusions. They sue you for $1M because they believe you did not properly reinforce the barrier to the outdoor dining area.

An umbrella policy can help cover the lawsuit on top of your business insurance.

Does Everyone Need Umbrella Insurance?

Of course, not everyone needs an umbrella policy. We all have various risk levels and tolerances. People who are single or just starting out in their adult life probably have no need for umbrella insurance.

For example, Let’s say you are 28 years old and earn $70,000 a year. You just bought a $40,000 Mustang Mach-E (nice! 😊). You’re single and have no kids. You have $15,000 in credit card debt and $50,000 in student loan debt to payoff. Odds on, you probably don’t need an umbrella policy because the $200,000 in auto insurance liability coverage offsets your income and covers your overall net worth of $125,000.

While the debt you have does not make you a target for a lawsuit and offsets the need for an umbrella policy; however, don’t let this hold you back from maximizing your life insurance as I explain here and also here. Another story for another time………. 😊

Be Careful With Getting Too Large of an Umbrella Policy

About the only drawback with getting an umbrella insurance policy is getting one with too much coverage.

I know, I know. I preach about “there is no such thing as too much insurance coverage”. Hear me out on this.

In a lawsuit, a personal injury lawyer can ascertain how much you have in overall assets and liability insurance.  A creditor can require your appearance at court for an asset hearing. You’ll be asked under oath questions about your assets and request proof regarding your net worth and ability to pay.

Failure to tell the truth under oath can make you in contempt of court and jailed with possible financial consequences.

The reason I am asking you to be careful with how much umbrella insurance is purchased is that it should not be more than your overall net worth.

For example, if you have a net worth of $2M but have an umbrella policy of $4M, an injury lawyer may see you as an easy target and go after you. The irony is that if you only had an auto insurance liability of $300,000 and no umbrella policy, the lawyer probably would not go after you or only go after the $300,000.

Personal injury lawyers go through a cost-benefit analysis before deciding to pursue personal assets. They will go after the easiest target with the most value for the time they put in. Personal injury lawyers are generally looking for insurance funds since it is an easy target. Sometimes, lawyers turn down cases if there is no insurance money to go after.

On the flipside, insurance companies also don’t want you to have more umbrella insurance coverage than needed. You may pay the premiums, but they pay the full amount. The good thing is that the higher the insurance policy, the more likely the insurance company will fight on your behalf!

It’s a slippery slope but one you need to walk. While this is something to consider, you need to assess your personal situation and the benefits / drawbacks on the amount of umbrella insurance you purchase.

Where To Go From Here?

There is nothing wrong with working hard for your money. You’ve worked a long time to accumulate a large net worth. It just would be a shame to have all that hard work go to waste over a lawsuit.

umbrella insurance protection

It makes sense to consider all options that protect yourself from litigation as well as your future income potential.

Even the most careful person with the best intentions can end up on the hook for a huge payout on a personal liability lawsuit. While the chances are low of this occurring, it’s smart business to do everything to protect yourself. Umbrella insurance can help you with that. Umbrella insurance is relatively cheap (you can get $1M in coverage for $150-$300 per year) and provides a lot of value.

Also ensure to periodically update your umbrella policy as your net worth grows. In an ideal world, enough umbrella insurance is purchased to cover your net worth. Therefore, it’s important to update your umbrella coverage to account for greater wealth.

So, what do you think? Do you agree? Disagree? I’d love to hear from you. Post your comments here.

Until next time………..

Live The Life You Love, Want, and Deserve….. 😊