What is an Umbrella Policy and Do I need one?

Every family has a few epic stories that get told over and over. Here are some of ours:

·       My brother wrecked a 4-wheeler into a gas meter. Actually, it was his friend (son of a Baptist preacher) that was driving. They were 9. No injuries, the gas meter was the only casualty.

·       My cousin and I flipped a go-cart. Kids used to line up in their driveway waiting for their turn on the go-cart. I wasn’t the driver; I was riding passenger on a one-man go-cart. We were 8 and 9. I still have the muffler burn as a souvenir.

·       The 4 yr. old neighbor ran straight through a 8ft by 4ft sliding glass door. That door was 1956 original and (not) safety glass. Super sharp spikes of glass were hanging from the ceiling. He had a few knicks. I witnessed a true miracle, and his Dad was a lawyer.

 Sometimes we get super lucky. Those epic dinner stories are told over and over because no one was injured, and no one got sued. That’s why the story is so epic. We live in a real-life matrix darting through liabilities each day.

 What if you are driving and have 4 other people in the car. You are involved in a car accident that was your fault. There are lots of injuries. You have “good” car insurance, but the limits only cover ½ of the expenses. Do you want to risk losing your net worth because of this accident?

 What is Umbrella Insurance?

Umbrella insurance is intended to provide additional liability coverage over the limits of your auto and home insurance policies. Liability is the type of insurance that protects you if you are sued for injuring someone or damaging someone else’s property. If you are at fault and required to pay damages (lost wages, medical bills, property repairs), then your assets could be at risk to cover the damages.

 Back to the example – lets assume there is $50,000 of property damage, $350,000 of medical bills for the broken arms and injuries, and one of the people that broke their arm is a surgeon who suffers lost wages of $200,000. The accident caused $600,000 of damages and your car insurance only includes $250,000 of total liability per accident. You are now responsible for $350,000 of excess damages. If you had an umbrella policy, the umbrella insurance should cover the difference between your auto policy and damages you owe.

What’s Covered? 

Details and exclusions can vary significantly between umbrella policies, but here are a few sample scenarios that would generally be covered:

·        Your teenage son gets into a car accident, and the cost of injuries to other drivers is above your auto insurance liability limit.

·        Someone falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.

Be sure the talk specifics with your insurance provider on what you want covered. For example, there may be exclusions or special riders that need to be added to cover watercraft (boats, jet skis), or other recreational vehicles (4 wheelers, dirt bikes). Policies do not cover injuries to you.

 Do I need an Umbrella Policy?

Umbrella policies are completely optional. It might be worth considering a policy if you:

+Own Property

+Have significant assets

+Are a public figure

+Own things that can cause injury (pools, trampolines, guns)

+Own a dog (be sure to check that the breed can be included in the policy)

+Are a landlord

+Have teenage children (inexperienced drivers)

+Coach sports teams

+Host parties at your home

+Serve as a board member for a non-profit organization

 What’s the cost?

Umbrella policies are generally sold in increments of $1 million. Policy cost will vary by state and might run $200 - $400 per year for $1 million of coverage. You will be required to increase your home and auto policy to the maximum liability coverages, and you might be required to bundle all three policies with the same insurer.

 How much Umbrella Insurance do I need?

This is personal to your own risk tolerance and the amount of assets you are looking to protect. Assets inside an employer sponsored 401k are generally protected from lawsuits. If you have assets outside of your 401k (taxable brokerage account for example), then you may want to look into an umbrella policy. Perhaps you never need the policy and spend $8,000 in premiums over a 20 year period. That cost will allow you to sleep at night protect you against losing $600,000 in the event of a freak accident.

 Look Both Ways Financial does not benefit if you buy an Umbrella Policy. Look Both Ways Financial is not a CPA firm.