Do you remember the last time it was pouring rain, you were trudging through it and were just lucky enough to have decided to carry your umbrella with you that day? Because you had it, you avoided getting soaked. Today, there’s another important umbrella we’re going to discuss that will keep you from getting soaked, not from water… but from liability.
What's personal liability coverage?
If you’re reading this, you probably have car and/or homeowners’ insurance. One of the coverages included in those policies is called personal liability coverage. It’s there to cover bodily injury, property damage, and personal injury to others if you’re held liable. It’s a pretty good coverage to have. However, most of these policies’ limits for personal liability coverage are far less than any damages for which you may be liable.
For instance, say you get into a bad car accident where you are put at fault and the other driver is left paralyzed. That person will most likely hire an attorney to sue you for damages including (but not limited to) medical expenses, legal fees, lost wages, pain and suffering, reduction in quality of lifestyle, and potentially punitive damages if your actions were considered negligent. When added together, you could be on the hook for $1 million or more!
If your auto policy only covers the Indiana state minimum of $25,000 per person, or even the average coverage of $100,000 per person, you’re far short of what will be needed. Without the insurance to pay what the court requires, you could have your assets seized and wages garnished until the other side is made whole - most likely the rest of your life if the award is large enough. However, this can be avoided if you have an Umbrella Policy.
What’s an Umbrella Policy?
An Umbrella Policy serves as an add-on to the liability coverage provided by your other policies. If you’re found liable and ordered to pay damages that exceed the limits of your auto or homeowners’ policy, your umbrella policy is there cover you, up to its maximum limit.
Because we live in a fast-paced, litigious society where one wrong judgement or move can end up subjecting you to a lawsuit, we recommend that everyone have at least a $1 million Umbrella Policy – even if they have less than $1 million in assets.
Why? That goes back to our car accident example. If you are sued, you could be forced to pay a legal judgement from your current assets and future earnings.
An Umbrella 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. If you earn more than $100,000 per year or have more than $1 million in assets, we recommend getting more than $1 million in umbrella coverage, up to at least as much as your net worth.
How much does an Umbrella Policy cost?
The price of an Umbrella Policy 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. The 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 to $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.
If you’re looking for extra cash to afford an umbrella policy, you may be able to find it by making adjustments to your current auto and/or homeowners’ policies. Boosting your auto insurance deductible from $250 to $1,000 could reduce your annual premiums by hundreds of dollars and make you less likely to file small claims – which could jeopardize a claims-free discount, while still leaving you with only $1,000 in out-of-pocket expenses for each claim. Then, you can use the premium savings to easily afford the most useful umbrella you’ll probably ever own.
Remember, just like the time to decide to bring along an umbrella is before it begins to rain, so is the time to purchase an umbrella policy. If you have any questions or would like assistance evaluating how to incorporate an Umbrella Policy into your insurance plan, we’re happy to help. Lean more at www.AnExceptionalLifeFinancial.com or get in touch at Info@AnExceptionalLifeFinancial.com.
Mychal Eagleson, CFP®, AAMS® is the President of An Exceptional Life Financial, a firm that specializes in financial planning for teachers and families with special needs. He frequently writes and speaks regarding personal finance topics relating to these clients. Mychal also serves on the board of the Financial Planning Association of Greater Indiana as the Director of Public Relations & Social Media. To read more of his articles or learn about An Exceptional Life Financial please visit: www.anexceptionallifefinancial.com.