When I first got started in the financial planning industry, I had the opportunity to sit in on a joint meeting between my clients and a wealth management specialist who came down from my home office.
The nature of the meeting was to discuss some estate planning strategies that my clients were interested in to protect their assets.
Ironically, the one item in the meeting that really stuck out to me wasn’t anything related to estate planning (at least directly).
The specialist, who was also very versed in insurance, had made a strong case that my clients needed an umbrella policy.
At the time I was young and realized that I didn’t even know what an umbrella policy was. The wealth specialist had shared instance after instance of why umbrella policies make sense for almost everyone, especially how inexpensive they are.
Personal umbrella insurance policies are often misinterpreted by consumers and are surrounded by myths so often that people can fail to recognize the importance of having additional coverage when they need it most. I’m amazed at how many people I come across who don’t really understand the basics and benefits of umbrella policies. (I guess I can’t be too amazed since I didn’t know about them. In my defense, I was only 24 :))
Umbrella insurance policies are thought to be too expensive to afford for average-income consumers and are too complicated to fit in with the insurance coverage you already have. But for many, the added protection of an umbrella policy may be just what your family needs.
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What Is an Umbrella Policy?
Umbrella insurance policies essentially rest on your existing insurance policies for your vehicles and your home. They provide extra protection in the event of a situation not fully covered by your normal insurance. Umbrella policies cover the gaps left by your existing insurance coverage.
How Does an Umbrella Insurance Policy Protect You?
For instance, in the event you are sued for liability in an auto accident and the judgment is declared against you for $500,000 but you only have $200,000 worth of liability coverage. The rest of the money would have to come out of your own pocket unless you had the umbrella coverage to fall back on. Without the additional umbrella insurance protection, you are susceptible to losing all of your assets to pay off the outstanding debts, including your home.
How Much Is an Umbrella Policy?
The cost of umbrella insurance coverage is not as expensive as some think. Premiums can range between $150-$300 a year for a million dollars worth of coverage over existing insurance policies. When we bought our first $1 million umbrella policy 6 years ago, our premium was only about $200 and I want to say it was less.
Actual premium costs are dependent on a number of factors including the current insurance company you are using, and the personal risk factors involved in your situation. The amount you pay will also be dictated by your credit score.
Umbrella policies typically carry very high deductible amounts, usually several hundred thousand dollars, because they are designed to be used only when all other insurance policies have been drained. An umbrella policy will require you to have both homeowners and auto insurance coverage in amounts equal to the amount of your deductible. Discounts can be obtained on the umbrella policies if you have the same insurance carrier for all of your coverage policies.
Recently, we increased our umbrella policy coverage with our insurance agent. Since we already had the rest of our coverage with them, we were able to get a decent discount for it.
Do You Need Umbrella Insurance Coverage?
There is no right answer to this question as every individual situation dictates a different need for insurance. It is worth noting that in today’s society lawsuits are commonplace and in the event an incident does occur, it is necessary to have the right protection to cover yourself, and your family, and protect your assets and interests with the right insurance. That has been the motivating force behind why we took out a larger umbrella policy and why I encourage my clients to at least consider purchasing one.
Consumers will need to determine their own risks for added protection such as the amount of time they spend driving their vehicles, the risk of people getting injured on their property, and the general nature of their financial and personal situation. You also need to check in with the terms of your existing insurance coverage.
If there are any gaps where coverage for specific incidents is not covered, such as being self-employed and having clientele regularly in your home, you may want to consider the options for umbrella insurance coverage. After an incident, it can be too late to protect yourself so check into the benefits of additional umbrella insurance coverage for the peace of mind it can offer.
The Bottom Line – You Never Know When It Might Rain, Better Have Your Umbrella (Policy) Handy
In navigating the unpredictable avenues of life, especially in a litigious society, having a cushion against unforeseen liabilities is wise. An umbrella insurance policy emerges as a sensible precaution, extending a financial safety net beyond the regular insurance covers.
Often misconstrued as expensive and complex, umbrella policies are relatively affordable and can be seamlessly integrated with existing insurance provisions. They bridge the coverage gaps, safeguarding one’s assets against potential lawsuits and unexpected claims.
The modest annual premium for a substantial coverage amount is a small price for peace of mind and financial security.
Every individual’s situation is unique, hence a thorough assessment of personal risks and current insurance coverage is imperative to ascertain the necessity of an umbrella policy.
