Imagine you are driving down the highway at 60 miles per hour and you spill your favorite iced coffee all over the floor. Innocently, you reach down to pick up the cup, not seeing the traffic stopped 50 yards ahead of you. Seconds later, BANG! You come to your senses with the front of your SUV smashed up and an airbag in your face. Fortunately, you are unscathed, but the group of individuals in the luxury sedan in front of you did not fare as well. In fact, all three of them have to be medevacked to the nearest hospital with life-threatening injuries. An innocent mistake just became life-threatening and costly.
The recovery process for all three of the individuals in the car you smashed progresses better than expected due to advances in medical technology, but the care for each of the individuals injured in the wreck is astronomical. In total, the expected hospital bills equal $350,000. Furthermore, the group of individuals riding in the vehicle you hit is a team of successful corporate executives. Each one earns about $500,000 per year and will be unable to work for the next 12 months. Again, an innocent mistake with a cup of coffee is going to be quite costly. In fact, if you add these potential liabilities together, you could be on the hook for as much as $1,850,000! Your liability insurance for your automobile only covers you for $250,000 per incident; thus, the remaining $1,600,000 may have to be paid out of your nest egg and hard-earned wages. If only you had purchased personal umbrella liability insurance…
What Is Umbrella Insurance?
Unfortunately, in life, each one of us tends to make some mistakes. The hypothetical example provided above is not impossible; it could happen to you tomorrow. Because of this reality, each one of us should prepare for unexpected events in life. One wise way to do this is to purchase personal umbrella insurance. If you find yourself in a situation where you are liable for substantial damages above and beyond your auto or homeowners liability insurance limits, umbrella insurance is the stopgap measure you need. Typically, if you have an umbrella liability insurance policy and a judgment is leveled against you, first the limits of your homeowners policy or car insurance policy will be exhausted. Your umbrella liability insurance policy provides coverage above and beyond your other liability policies. In the automobile accident example provided in the introduction, assume that you had a $2 million umbrella liability insurance policy in place in addition to your car insurance liability coverage. All of the damages and the court costs associated with settling those damages would likely be covered between your two liability insurance policies. Umbrella insurance potentially gives each of us additional coverage for the times in life when we make mistakes.
Furthermore, umbrella insurance not only provides a second layer of insurance if liability should arise due to an incident with your automobile or at your residence, but it can also provide a first layer of coverage for other types of liability incidents. According to Alex Glenn of popular personal finance resource NerdWallet, your personal umbrella insurance policy may also provide protection against libel and slander claims (2017). However, make sure you work with your insurance agent to review exactly which types of liability protection your umbrella policy provides.
Who Needs Umbrella Insurance and What Does It Cost?
It could be argued that anyone over the age of 18 with a car, a job, and/or property would benefit from an umbrella liability insurance policy. To the extent that you have resources or a future income stream that could be garnished, it becomes all the more critical that you put an umbrella insurance policy in place (Glenn, 2017). At Semita Asset Management, we strongly suggest that anyone with a net worth in excess of $500,000 purchase umbrella insurance. If your net worth is below that level, you may still benefit from a policy, but your car, renters, and/or homeowner’s liability insurance may sufficiently cover you against liability inasmuch as the court would likely take into account your asset base when awarding a judgment. Additionally, there are limits as to the degree to which your wages can be garnished.
Fortunately, the cost of umbrella insurance is not too insurmountable. According to the Insurance Information Institute, the first $1 million of umbrella liability insurance costs about $150-$300 per year in premiums (2016). Above that level, expect to pay about $75 per year for the next $1 million, and $50 per year per million in coverage above $2 million (Insurance Information Institute, 2016). For most individuals, an umbrella policy is not too challenging to fit into the budget. The amount of protection provided, along with the accompanying peace of mind, is well worth the cost.
How Much Umbrella Insurance Do I Need?
There is some debate about how much umbrella insurance is necessary. However, a good rule of thumb is that you should purchase at least 1-2 times your net worth in coverage. The typical umbrella insurance policy starts at $1 million in coverage, and most policies are sold in $1 million increments up to $5 million or $10 million. If you have a net worth between $500,000 and $1 million, we suggest that you move forward with purchasing the $1 million policy, particularly in light of the reasonable cost. Assuming your net worth is in excess of $5 million, you may have difficulty finding a policy that provides coverage for your entire nest egg. The likelihood of a personal liability suit in excess of $5 million is more remote, so the need for additional coverage above this level may not be warranted.
Regardless of your net worth and elected level of coverage, it is highly critical that you coordinate your umbrella insurance policy with your automobile and homeowners insurance policies. What does that look like? Assume in the following example in Table 1 that you have a homeowners liability policy covering $250,000 of liability and an umbrella policy covering $2 million in liability. You have a $1.5 million liability claim leveled against you:
As you can see from this illustration, your homeowners liability policy covers the first $250,000 of liability, but your umbrella insurance policy only begins to pay with $500,000 of homeowners liability insurance coverage in place. Thus, you will be responsible for the $250,000 “gap” between the two policies. If your homeowners liability limits instead extended to $500,000, as they do in Table 2 below, you would not have any out-of-pocket expenses associated with this liability event:
As you can see in Table 2, all of your liability exposure would be covered if you coordinated your umbrella insurance and homeowners insurance policies. The same would be true if you were seeking to coordinate your automobile insurance liability policy and your umbrella insurance liability policy. Coordination could save you from many financial headaches. Consult with your independent insurance agent to make sure that your liability policies do not have any gaps.
Concluding Thoughts on Umbrella Insurance Policies
In a litigious society such as ours in the United States, umbrella insurance makes great sense, particularly if you are someone who may be more susceptible to a lawsuit prompted by a personal liability event. If others believe that you have financial resources due to your career choice or lifestyle, the possibility of a suit increases. Furthermore, if you do in fact have financial resources that you want to protect for future needs, charitable intentions, and family members, you are a prime candidate for umbrella insurance as well. Ultimately, having an umbrella insurance policy is likely to increase your peace of mind, protecting you if the unexpected should occur.
If you have questions about personal umbrella liability insurance or any other financial issues, we encourage you to reach out to us. We are always happy to answer questions and meet new people. Should you desire to schedule a conversation with us, please use our scheduling link to set up a date and time that fits with your schedule. However, once you decide to move forward with purchasing an umbrella insurance policy, we encourage you to reach out to your independent insurance agent. Shop around and consider bundling your umbrella policy with your home and auto insurance to get the best deal. The peace of mind that you will experience once you have an umbrella policy in place will be worth the effort and the premium cost.
Justin Reede is a Financial Planner at Semita Asset Management LLC. He specializes in providing risk management, education, estate, investment management, and retirement planning advice. Justin graduated from the Liberty University Summa Cum Laude with a Bachelor of Science in Business Administration: Financial Planning. He is a candidate for CFP® Certification, having fulfilled the examination and education requirements in 2017. Learn more about Justin by connecting with him on LinkedIn.
(1) Glenn, Alex. 2017. “Understanding Umbrella Insurance.” NerdWallet. NerdWallet. October 6. https://www.nerdwallet.com/blog/insurance/umbrella-insurance-complete-guide/.
CFP® () and CFP® () in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements
*The designation of Chartered Financial Analyst [“CFA”] is conferred by the Chartered Financial Analyst Institute, Charlottesville, Virginia www.cfainstitute.org. The CFA candidate must meet the following requirements to be eligible for the designation:
1) Possess of an undergraduate degree plus four (4) years professional experience involving:
- Evaluating or applying financial, economic, and/or statistical data as part of the investment decision-making process involving securities or similar investments, which includes, but is not limited to, publicly traded and privately placed stocks, bonds, and mortgages and their derivatives; commodity-based derivatives and mutual funds; and other investment assets, such as real estate and commodities, if these other investment assets are held as part of a diversified, securities-oriented investment portfolio; or
- Supervising, directly or indirectly, persons who practice such activities; or
- Teaching such activities, and
2) Successfully complete a study program that culminates with three (3) levels of examination each of which requires approximately 250 hours of study and preparation. The CFA Institute has a non-mandatory, or voluntary, program regarding continuing education requirements for the CFA charter holder.
**The designation of Certified Kingdom Advisor® [“CKA”] is conferred by Kingdom Advisors, Atlanta, GA www.kingdomadvisor.com The CKA candidate must be a disciple of Christ who has committed to be a person of character who, from a biblical worldview, serves clients with biblical financial advice in order to properly steward the resources entrusted to them. Kingdom Advisors has created the Certified Kingdom Advisor® designation to provide confidence to those looking for financial counsel from a biblical perspective. The Certified Kingdom Advisor® designation is given to advisors who:
- Complete the Kingdom Advisors’ Core Training
- Provide evidence of their technical competence
- Commit to personal stewardship
- Assert their belief in Jesus Christ
- Provide evidence of their personal integrity
- Commit to incorporating biblical wisdom into their financial advice