By Mira Ma, CFP®, RFC®
The stock market continues to climb at a steady rate, and an increase in personal wealth may bring greater financial flexibility. However, increased personal wealth can also lead to much larger liabilities. Individuals with high net worth or those who are perceived to have high net worth are more likely to be sued.
Personal injury claims can reach into the millions if you have high net worth. To protect yourself from lawsuits due to personal injury claims, you should consider purchasing umbrella liability insurance. This type of insurance coverage protects you and your assets from a potential lawsuit. It provides additional coverage that your existing automobile and homeowner’s insurance policies do not offer.
A common scenario: Your teenage son borrows your car and gets into an accident. The other driver suffers a serious injury because of the crash that results in a lawsuit and a $1 million judgment against you. If your car insurance policy has a liability limit of $500,000, then that is the only amount that your policy can cover. That means you will have to cover the rest of the judgment, potentially resulting in liquidating some of your assets, losing the equity in your home, or even having your wages garnished.
But if you have umbrella liability insurance, the remaining $500,000 will not be taken out of your pocket. Instead, the insurance will automatically kick in and cover the rest of the amount.
What Is Umbrella Insurance?
Umbrella insurance is a type of liability insurance that protects you and your assets from lawsuit judgments that are beyond your existing policy limits. It is also known as excess liability coverage. An umbrella insurance policy provides protection over the limits of your standard homeowner, vehicle, and boat insurance. It can also provide cover for claims that are not covered by your existing liability policies.
Umbrella insurance is recommended for people with existing homeowner and auto insurance who want to preserve their property and other valuable assets. The insurance is often sold in increments of $1 million and, generally, costs just a couple of hundred dollars each year.
Who Should Have Umbrella Insurance?
The decision to buy umbrella liability insurance depends on several factors that include what you may lose and how much risk you are taking. It also depends on your lifestyle. You should consider purchasing a policy if you:
- Frequently entertain and serve guests alcohol
- Operate a business out of your home
- Employ uninsured workers on your property
- Drive a lot of miles or have teenage drivers
- Have a dog, especially if the breed is known to be aggressive
- Own jet skis, boat, motorcycles, or snowmobiles
Even if you have not earned your first million yet, you should consider the advantages of umbrella liability insurance. You do not need to be a millionaire to be sued for a million dollars. Anyone who is building a financial portfolio may want to limit their exposure to risk, and the most inexpensive way to help protect current assets and future income from the unexpected is through an umbrella liability insurance policy.