Umbrella insurance is a vital part of many financial plans. As comprehensive financial planners, we look at much more than just your investment accounts – Insurance review is also a big part of what we do, this means in addition to looking at life and disability insurance, we also evaluate the coverages on your home and auto policies.
And one gap in coverage that exists on all home and auto policies is that your liability protection is limited, usually to $300,000 or $500,000.
If you have a net worth above this amount of liability coverage on your home and auto insurance, your nest egg may be at risk.
And that is where umbrella insurance comes in:
This is a type of liability insurance that is purchased in addition to your home and auto that kicks in if an accident occurs that causes you to exhaust the liability coverage of your current home and auto policies.
This insurance can protect you from a very wide variety of events, that make it useful for everyone from young families to those later in their retirement. It can protect you from liability as a result from a car accident, accidents with your kids and their friends around the house on a trampoline or swimming pool, dog bites, and even claims for bullying.
Searching online for example umbrella insurance claims will provide you with many examples, and here is how umbrella insurance pays out in a typical claim scenario.
Let’s say you get into a car accident and end up getting sued for $750,000 to cover medical bills, property damage, or for added “pain and suffering”. Even if you maxed out the liability protection on your auto insurance policy, you likely do not have more than $500,000 in liability coverage.
If you do not have added umbrella insurance coverage in this scenario, you will have to pay out the remaining $250,000. If you have an umbrella policy, it will pay the remaining $250,000.
Calculating how much umbrella coverage to get can depend on a lot of variables. This is because states have very different laws on how different types of retirement accounts are protected in case of a lawsuit. Many states shield retirement accounts from being subject to judgements, but not every state does!
If you’re in California or Minnesota for example, you have very little protection at all and should probably buy coverage to protect your entire net worth, even if most of it is in IRAs or Roth IRAs.
For those in other states, and who have a majority of their savings in a 401(k) or other protected retirement account, your need may technically be a lower amount than your net worth.
It also depends on what types of assets you have. Even if your state fully protects your 401(k), if you have a large brokerage account, valuable real estate, or other collectibles, you may still have many assets that are subject to liability.
Umbrella insurance is usually purchased in increments of $1 million, or $500,000 with a minimum coverage of $1 million.
This type of insurance is usually very affordable, perhaps a few hundred dollars per year in premium for each million dollars in coverage. Though this may vary widely depending on where you live.
Working with a financial planner can give you a second opinion on your insurance coverage, from a neutral party. We are a “fee-only” financial advisor, which means that we do not accept any commissions from our clients. Arnold and Mote is not paid any more or less if you purchase any insurance policy we recommend. We believe that puts us in position to act only in the client’s best interests.
If you are looking for a financial plan that not only helps you achieve your goals, but also insures your assets are protected please reach out to a comprehensive, flat fee, fee-only financial planner today.