Why You Need an Umbrella Insurance Policy

Kiplinger tells us why many of us need an umbrella insurance policy and gives the following guidelines:

He recommends that everyone have at least a $1-million umbrella policy to provide liability coverage beyond the limits of their auto- and homeowners-insurance policies -- even if they have less than $1 million in assets. That’s because in the rare event you are sued, you could be forced to pay a legal judgment from your current assets and future earnings. The policy can also pay for defense costs, which can quickly add up even if you win your case. It’s an inexpensive way to protect your finances from devastating lawsuits.

Freedman recommends getting more than $1 million in umbrella coverage if you earn more than $100,000 per year or have more than $1 million in assets. “Our clients get liability-insurance limits that are at least as much as their net worth,” he says. Daniel Morris, a CPA in San Jose, recommends at least a $2-million umbrella policy for most people, or a policy for $3 million to $5 million if you have rental property.

The price varies by risk, but someone with one house and two cars would generally pay about $200 a year for the first $1 million in umbrella coverage and another $100 for the next $1 million, says Bill Howard, an independent insurance agent in Alexandria, Va.

Umbrella policies are inexpensive because they kick in only after you’ve exhausted your liability coverage under your auto or homeowners policy. Most insurers first require you to have $300,000 or $500,000 in liability coverage on your car and home. For example, if you have $500,000 in liability insurance on your auto policy and a $1-million umbrella policy, you’ll have a total of $1.5 million in liability coverage.

Some thoughts from me:

• This was key for me: "you could be forced to pay a legal judgment from your current assets and future earnings." Even if your assets are low, your future earnings are probably not (unless you're 70 or older.) As such, you need to protect them and umbrella insurance is a great way to do so.
• I've had umbrella insurance for quite some time now and I've increased it over the years. In fact I just talked to my agent last month and I will be bumping it up again when it's due later this month.
• As they say, it's pretty inexpensive for the coverage you get. Here's what I was quoted by my agent:
-- $2 million in coverage - $228
-- $3 million in coverage - $304
-- $4 million in coverage - $365
-- $5 million in coverage - $410

For more on umbrella insurance, check out these posts:

• The Basics of Umbrella Insurance  
• Why You Might Need Umbrella Insurance  
• Umbrella Insurance Is Always the Right Answer  

How about you? How many of you have umbrella insurance? And if you don't have it, why not?

Comments

[bb]

This insurance is at the bottom of the insurance list. I'd rather use the extra money to buy max car/home insurance first.

[Claire]

I own a small business that works with young children. I have umbrella insurance - just too risky not to. Nature of the industry :-/

[jim]

Umbrella insurance can make sense if you have a lot of assets and a reason to be concerned with liability.

Keep in mind that the likelyhood of large lawsuits is quite low. Large lawsuit awards are really not all that common as TV and movies portray. Your chances of losing a lawsuit for over $1M are roughly around 1 in a million.

[Tyler]

There is a reason its so cheap... because its highly unlikely to be used. Everyone's risk profile is different but I think its towards the bottom of the list for most people. I'm not a lawyer but assets can be protected in better ways then simply insurance.

I have $1mm because it fit into my overall insurance needs and risk profile, but its not really something I care about or feel I must have.

[Nashville]

I just increased my umbrella policy from $1m to $3m which costs me less than $200 per year. If you can afford it, it sure provides peace of mind and protection of assets. If you can't afford it, that's fine because you likely don't need it. I would shoot myself if one lawsuit wiped out my entire life's work building up my net worth heading into retirement.

[Sam M]

Thanks for the push. I meant on getting Umbrella insurance for sometime now. finally got one couple hours ago. The rates were comparable with what you mentioned.
$1-mil coverage at $149.

[Kathy F]

I got $1 million umbrella insurance for the first time this year. Not too worried about some attaching my future earnings but attacking my big pile of retirement funds if something should go wrong.

[TJ]

Thinking about it, but confused as to how much to get.

I dont understand why recommendation is tied to net worth/income. If I am worth $1M and get $1M policy and lose a $2M lawsuit, I assume I'm wiped out. If I get a $5M policy and lose a $6M lawsuit, I assume I'm wiped out. So I'd think how much you get has little to do with your net worth and instead everything to do with the normal settlement amounts for the things I might get sued for, which I have no idea the numbers for.

Anyone know of a different standard to use other than net worth/income?

[Mary Kay]

We've had it for many years and increased our coverage a few years ago. I believe that the insurance covers legal bills associated with liability issues, which would be a big help even if there is never a big judgement against you.

[Old Limey]

I have an Umbrella policy on top of our two auto insurance and two real estate policies.
I tend to feel that our greatest liability could result from a very serious auto accident that had fatalities. For this reason my wife and I decided some years ago that it was a good idea to never have passengers ride in either of our cars that were not family members. In this litigious society, with medical costs being what they are, even a person that you may consider a good friend would likely sue you in the event of a serious injury or death knowing that you had pretty deep pockets. We also feel a lot better that now that we are both retired and in our mid seventies we no longer do much driving, especially at night, far afield, on freeways, or in heavy commute traffic. My car does less than 500 miles/year, the other more economical one that we both use does about 3000 miles/year.

[JM]

Have any of you actually used your umbrella insurance? We did last week. My hubby was notified he was being sued both personally and professionally, relating to an incident at work. He has professional liability insurance but this suit specifically was BOTH personal and professional. We've had umbrella insurance for 5 years. Our agent's first response was "this is not covered, since it is a work matter." Also, they basically said it's just an extension of the auto policy...they didn't want to get involved in starting the claims process. We did eventually get in touch with their attorneys, but it's a slow process of course.

[indio]

Out of curiosity, how much coverage did you get FMF? I have a $2M policy but I'm thinking of upping it. My kids have friends over birthday parties and playdates. Fortunately, my kids aren't old enough to drive. Even though I work from home, I'm concerned about someone getting hurt or a someone that is working for me getting injured. I usually check that they have workman's comp but don't ask how much. There is always a lingering concern about someone using a minor accident at my house as a means to fund their retirement plan.

[FMF]

indio --

It hasn't come up for renewal yet, but I'm thinking either $3 million or $4 million. If you think about current assets PLUS future earnings, the amount you need to cover can add up quickly.

[Richard]

I recently upped ours to $3m. Why not? The cost was only up to the mid $300's per year.
Who knows what it will it will actually cover in the event? Probably no one will slip in one of our bathtubs and be paralyzed for life. Nor, one of our autos could be blamed for a horrendous injury to some uninsured motorist and his wife and little baby? To whom do you think a jury give their favor? Joe X, who actually caused the accident but was crippled for life, or us, who could afford to pay for our injuries and his lifetime care too.
I show it as a deduction against our rental income on form 1040,Schedule E, line 9, insurance, thus getting 35% of the premium back each April. (total of both state and federal)
Hopefully, I will never have to file a claim on the Umbrella insurance.

[Georgia]

I guess I don't need it. I am 73, own a 45 y/o dbl. wide trailer, have a 2000 model car, live on SS & 2 small pensions and have less than $100k in my retirement savings.

See - another wonderful reason for being older. I just love being old. It is a ball.

[braindaily]

Umbrella insurance is a great way to be covered in the event of freak accidents and subsequent lawsuits pinning you down. $1 million coverage doesn’t really cost much and goes a long way in settling bills that go beyond the liability of your home and car insurance coverages.