Personal Umbrella Insurance-Bullet Proofing Your Assets 5/20/07
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
Personal Umbrella Insurance-Bullet Proofing Your Assets
“Personal Umbrella Insurance- Bullet Proofing Your Assets”
Over the past few weeks, I have discussed the importance of having adequate homeowner’s and auto insurance. However, even the maximum coverage under each policy may not be sufficient if you get involved in a serious liability case. Fortunately, there is an excellent and inexpensive solution to this problem. A Personal Umbrella policy is designed to pick up where your homeowner’s and auto polices leave off and increases your protection by $1,000,000 or more. Here’s how it works.
The Personal Umbrella policy has a very large deductible, often $300,000 or $500,000. To satisfy this large deductible, you must raise the underlying limits of both your homeowner’s and auto coverage. For example, if your homeowner’s and auto coverage both had $100,000 limits for liability, and the umbrella policy had a $500,000 deductible, you must raise your homeowner’s and auto liability limits to $500,000. Let’s say you are at fault in a car accident that severely injures another person and that person is awarded a $1.2 million judgment. Your basic auto policy would cover the first $500,000 while your umbrella policy would cover the remaining $700,000. In fact, you now have $1,500,000 of total coverage: $500,000 of basic coverage plus $1,000,000 of umbrella coverage.
The cost for this coverage is very affordable, given the peace of mind it provides. A $1,000,000 umbrella policy can cost as little as $150 per year. “Factors influencing the premiums include number of cars, homes, youthful operators, pools, ATV’s, boats and the driving record of the operators,” says Ben Jackson of Sevier, Fowlkes & Jackson Insurance, a division of Compass Insurance Agency, Inc.
Many people erroneously believe that they are ‘suit-proof’ because they have few assets. In fact some newly-minted physicians take this position because their student loans place them squarely in negative net worth territory. However, a judgment can be held until you become successful or your future earnings could be garnished. Therefore, unless you are committed to a life of financial destitution, you should consider having an umbrella policy.
How much coverage should you have? Most people should have at least the minimum $1,000,000 umbrella policy. For our clients who have begun to accumulate considerable assets, we quickly increase the coverage to a range from $2 million to $5 million. The cost of higher coverage runs less than $1,000 per year.
A real life example: A good friend and client’s car hit a patch of ice and slid into the oncoming lane causing a head-on collision. Two passengers in the other car were not wearing seatbelts; both went through the windshield, receiving severe facial lacerations requiring extensive plastic surgery. They sued and received a mid six-figure settlement. Fortunately, my client had an umbrella policy which covered the settlement. Otherwise, his personal assets would have been at risk.
Finally, it’s worth remembering that a personal umbrella policy insures many situations that are not covered under the typical homeowner’s and auto policy including extended coverage for defense costs, slander, rental cars, play-toy rentals such as jet skis and boats, non-profit work and pollution. Also, I recommend buying your umbrella policy from the same company as your homeowners and auto policy to make certain there is no gap in coverage.