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Who needs an umbrella policy?

I signed up for an umbrella insurance policy when I was in my early 20’s because the financial advisor my wife and I were working with required all of his clients to have one.   At the time, I did not know much about it and luckily I have not had to use it.  However, now that I am a property and casualty insurance agent, I understand the benefits of having an umbrella policy, and I’m thankful that I’ve had it all these years.

An umbrella insurance policy starts at $1M of coverage and provides liability coverage in two ways.  First, if you have the proper home and auto coverage the umbrella policy will act as additional liability coverage on top of those policies.  Second, it will provide coverage in situations where your home or auto coverage may not be available (see scenarios listed below).

There are several reasons why I like umbrella policies.  Here are the primary benefits:

  • Even given continual increases in rates, umbrella policies are inexpensive.  Cost varies, but an average family with a house and 2 cars can get $1M coverage for $300 or less a year.  If the policy is used even once it will likely pay for a lifetime of coverage.
  • Lots of accidents happen to friends, family, or people you know.  An umbrella policy will be there to provide financial support if that is the results of a lawsuit.
  • It’s a way to build a moat around your assets.  At Welch Financial Planning, we obviously talk about personal finances and retirement a lot.  I like to joke that no one has ever drawn up a financial plan where in year 21 you get sued for $1M, most of your assets disappear, and you have to start over financially.  An umbrella policy is a tool to use to help prevent that from happening.

The need for an umbrella policy can be somewhat correlated to the amount of assets you have and your lifestyle.  More assets create a greater chance of litigation.  Although, just because you don’t have assets doesn’t mean you won’t be asked to pay a lawsuit later in life.  With statutes of limitations and using the legal process to collect, you may have to pay for a lawsuit 10-20 years later.

Another factor to be aware of is the costs of ‘pain and suffering’ in a lawsuit.  Nuclear verdicts are becoming more common.   While most nuclear verdicts are against businesses and not individuals, there are still plenty of law firms advertising big settlements against individuals.  Large Colorado law firms advertise winning big and list several lawsuits where the settlement was +$300k on their websites.  The $300k does not include lawyer fees and lost wages, all of which would be covered by an umbrella policy. While, as you may have guessed, all of this is causing premiums to rise, an umbrella policy can still be well worth the cost. Here is a great infographic on the scenarios causing the increase in premiums.

Here are common scenarios where umbrella coverage can help if an accident occurs or a lawsuit is brought against you:

  • Hosting parties at your home, e.g. with alcohol
  • Coverage extends to your children in case they were involved in an incident
  • Situations where you assume responsibility for other peoples’ children
  • Your family’s use of social media
  • Travel abroad
  • If you volunteer with a charity or serve as a board of director, participate in a HOA

I want to acknowledge that I don’t think you are a bad person.  I hope you and I will never have to use an umbrella policy.  But there are accidents and unfortunate circumstances that happen every day when this coverage is needed.

Note that umbrella policies are not a failsafe to financial ruin.  There are some general exclusions for umbrella policies and every insurance provider has their own fine print on requirements and coverages.  Like all insurance policies, a personal umbrella policy does not cover intentional injury.  But, of the tools available to achieve financial success, this is a top rated and valuable one to implement.

I suggest having liability coverage 1-2 times your assets.  If you do have assets over $300k then an umbrella policy is something to consider.  We are here to review your financial situation and assess the appropriate amount of coverage for your family.  By the end of May I encourage you to list out your assets and an estimate of what they are worth.  From there we can review your insurance coverage, suggest changes, and even complete multiple insurance quotes to make sure you are not overpaying for coverage.


To your financial success,

Brad Christian