Many people have the mistaken impression that umbrella insurance is only for the wealthy, but that’s not true. Personal finance specialist and CPA Mitch Freedman says, “As long as you can earn a livelihood, you should have an umbrella liability policy.” That’s because if you do lose a lawsuit, you can be held personally liable based not only on your current assets, but also on all future earnings. Wages can be garnished as part of a legal settlement.
An umbrella policy protects you from that risk. It adds liability protection over and above your homeowners and car insurance up to a limit you choose. Most policies cover you up to $1 million to $2 million, but the very wealthy may choose higher amounts. Umbrella policies do require that you maintain liability limits on your homeowners or car insurance policy. Usually insurers require you to carry $300,000 to $500,000 liability coverage on your car and house.
Why Get It?
So what are the three key reasons you may want to get an umbrella policy?
1. To protect yourself if someone is injured on your property and sues you. The liability insurance will not only cover the cost of any medical bills, it will also pay for your legal defense if the costs add up to more than the liability coverage on your homeowners policy.
2. To protect yourself if you are involved in a car accident and are sued. After your insurance is maxed out, the umbrella policy covers the rest up to the policy limits.
3. To protect yourself from slander or libel or other types of lawsuits not covered by your home or auto policy. For example, in today’s world, what you post on social media could leave you open to a lawsuit. Million-dollar lawsuits have been filed against posters on Facebook and other social media. The umbrella policy would cover any legal costs and any settlement. Even if you win the suit, out-of-pocket legal costs can mount quickly. (See Can You Be Sued If You Give A Bad Review On Yelp?)
Any one of these reasons can add up to a million dollars or more in claims. You may not have that much on hand, but if you lose the lawsuit, the judge can award all your assets and any future earnings until the claim is paid.
What’s the Cost?
Umbrella policies do vary by risk. If you have a house and two cars, you can expect a premium of about $200 for $1 million and you can add on a second million for about $100. Do you really need $2 million? As Jack Hungelmann, author of "Insurance for Dummies" wrote, “You can’t control whom you might injure.” You could injure a CEO or professional ballplayer and owe millions for lost earnings.
If you think you can’t afford the premium, consider increasing the deductible on your homeowners and car insurance policies to $1,000, which likely will save you enough to cover the premium cost of umbrella insurance. That does mean you will have a higher out-of-pocket expense for a minor accident, but most agents recommend against filing small claims because it can hurt your claims-free discount or even result in a loss of a policy for filing a claim.
How Much Do You Need?
Freedman, who heads Mitchell Freedman Accountancy, in Westlake Village, Calif., recommends that everyone should have at least a $1 million umbrella policy. If you earn more than $100,000 per year or have more than $1 million in assets, then you should get more. Other CPAs recommend that their clients carry an umbrella policy with limits at least up to their net worth and advise people with rental properties to have a policy for $3 million to $5 million.
The Bottom Line
Umbrella coverage of at least $1 million is a good idea if you have assets or are earning a salary. The small amount you pay for the coverage can give you a lot of peace of mind and protection.