Umbrellas Aren't Just For Rainy Days
Accumulating assets is only part of a solid financial plan. Beyond taking action to build wealth, you need to consider protecting your wealth too.
Most people are familiar with insurance for homes and automobiles. If you have an outstanding loan, your lender requires insurance coverage. In addition to repairing or replacing your auto or home, these types of policies can also protect you from personal liability. If someone gets hurt or property is damaged, your insurance could pay the associated costs, including legal fees.
An umbrella policy, also known as excess liability or personal liability, provides additional protection. It kicks in when the coverage under your regular policies is exhausted. Because this type of coverage is optional and supplemental to other insurance, it is not as well-known, and it's often thought of as something only for people with very high levels of assets.
While individuals with large amounts of assets have a need for protection, there is a case for everyone to consider an umbrella policy. It doesn't just cover your current assets – an umbrella policy can help you protect what is potentially your biggest asset: your future income. An umbrella policy can protect you if something happens that requires large enough financial compensation to create financial hardship in the future.
What is an Umbrella Policy?
At its simplest, an umbrella policy extends your insurance coverage in two dimensions. It increases the financial coverage available to you, and it can be written to cover types of liability that are not available with standard insurance policies.
What Does an Umbrella Policy Cover?
In addition to providing additional coverage for bodily injury or property damage, an umbrella policy can cover you if you are the subject of a lawsuit for other actions, such as slander or libel. While this may seem farfetched if you are not in a public-facing or prominent role – it's not. People have been successfully sued for negative online reviews of small businesses. Our online lives have expanded the public sphere, and it can now encompass all of us.
Who Should Consider Additional Coverage?
In considering if an umbrella policy is right for you, you should first look at your financial picture. Do you have significant assets, want to protect future income, own a business, or have an investment property? Those could all be worth additional protection.
There are also certain lifestyle factors that you may want to consider. If you coach youth sports, enjoy activities like skiing, surfing, hunting, or boating, or have certain dog breeds, among other things, an umbrella policy may be right for you.
Essentially, you want to assess your risk. If you're a homeowner who has a lot of houseguests, or you enjoy entertaining, drive considerable distances, or very frequently, your risk is higher. If you engage in activities that put others at risk, you should think through the implications of a mishap or accident.
Assessing Your Assets
You'll want to carefully think through your current assets and future salary expectations. Protecting a future income stream depends on your lifestyle and financial responsibilities. There could be a wide range of reasons to want to protect your income. Consider if you have kids you want to put through college, educational goals for yourself, an expensive hobby or other activities that provide value and meaning to your life, or you are saving to start a business or other venture. The list could go on and on.
There are some assets you do not need to consider. The Employees Retirement and Income Security Act (ERISA) protects employer-sponsored retirement accounts from exposure to civil liability, and up to $1 million of assets in an IRA are similarly shielded. You may also live in a state that has a homestead law that protects your primary residence against judgments.
Isn’t It Very Expensive?
Surprisingly, $1,000,000 worth of coverage is not expensive! The cost can be relatively low due to the supplemental nature of the policy. Most insurance companies require you to have a relatively high level of regular insurance coverage, generally a minimum of $250,000 of personal liability on an auto policy and $300,000 of liability on a homeowner’s policy, before you are eligible to apply for $1 million umbrella coverage. This lowers the probability of you making a claim and justifies the lower cost.
The cost of supplemental insurance is usually $300 or less per year for the first million in coverage. If you want a higher policy, the incremental premium cost of each additional $1 million gets gradually smaller. Similar to home and auto policies, in most states, if you add the policy with an existing insurer, the insurer will usually give you a discount.
The Bottom Line
Umbrella policies aren’t just for the very wealthy. They can help anyone protect their lifestyle and help protect their future income stream. A financial advisor can help you assess your potential protection needs and a trusted insurance agent can provide quotes. Life can be unpredictable, and protecting your assets could prove to be a good financial move.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.