April 26, 2022 Jennifer Odom

The Importance of Personal Umbrella Policies

  • What will you do if you or your child causes a car accident that results in significant injury or death of another?
  • What if someone is seriously injured at your home and claims you were responsible? 
  • What if your dog bites an intruder on your property and then the intruder sues you for damages? 

In each of those scenarios, how would you pay for the damages? What if the injured person sues for millions of dollars? Who would pay to defend you in a lawsuit, even if a lawsuit is frivolous or without merit? 

The fact is the wealthiest families must address these types of questions head-on. As a result, they are very attuned to making sure their wealth is protected from lawsuits resulting from scenarios like these.

One component of a rock-solid wealth protection plan that is too often overlooked or underused—even by the affluent—is the umbrella policy.

An umbrella policy makes sense if you have significant assets.

The benefits of umbrella policies

You have insurance policies on your homes and vehicles. You may also insure other types of assets (boats, airplanes, etc.). But do you have enough coverage, considering your personal wealth?

If you are financially successful, the answer is probably a resounding NO.

The reason: Most insurance policies top out at around $500,000 of liability coverage. That is not likely to be nearly enough if you or a family member are involved in a serious accident.  For example, someone who is injured in a car accident or on your property may seek a lot more than $500,000 in damages. And when they find out you are worth a substantial amount, they may well pursue an even larger payment.

That is where an umbrella policy (also called an excess liability policy) can make an enormous difference. An umbrella policy kicks in when your other liability policies (such as your car insurance or homeowners’ insurance) hit their limit. Example: If you are involved in an accident and are sued for $1 million, but your car insurance covers only $300,000, your umbrella policy could cover the difference, so you don’t have to use personal assets.

An umbrella policy is useful to help protect your assets from larger claims and lawsuits.

To obtain an umbrella policy, you must have the other insurance policies (car, homeowners, etc.) in place.

Another Important consideration– Make sure there isn’t a gap between your other policies and your umbrella policy. Where your car insurance ends, for example, the umbrella should take over—otherwise, you could be on the hook for that gap. And if the underlying car insurance policy is not addressing certain risks, then the umbrella policy can also miss covering these risks.

Coverage Above and Beyond

An umbrella policy usually covers bodily and psychological injuries, and can include coverage for slander, libel, and defamation. It can also cover damage caused by someone else for whom you are responsible, such as a child.

A big enough umbrella?

We find that most wealthy individuals and families don’t have large enough umbrella policies to adequately protect their assets. If a legal judgment is greater than your liability coverage, you are going to have to cover the difference—which could mean selling assets, possibly at fire-sale prices.

Pro tip: A general rule of thumb is that if your net worth is $20 million or less, make sure your umbrella policy covers what you’re worth. If you are worth more than $20 million, it becomes a question of how much risk you’re comfortable taking on.

Many ultra-wealthy entrepreneurs, for instance, will buy an umbrella policy that is as large and comprehensive as possible. While the odds of having to use it are unlikely and reaching the limits of the policy are even more unlikely, the possible financial downside from a serious accident and substantial lawsuit is not worth the risk. As an entrepreneur with a $10 million umbrella policy told us, “It costs less than putting an attorney on retainer to defend you in the event of a suit.”

That said, it can be challenging to insure up to the amount you wish. That is because some insurance companies cap the size of the policies they offer, usually at $5 million. If you require more than $5 million in coverage, you may need to enlist a specialty insurance company, which might be able to offer policies of up to $100 million.

The cost of coverage

How much will an umbrella policy cost you? A number of factors determine the cost of coverage, including:

  • Number of homes and where they are located
  • Number of cars and the number of people to be covered (including their ages and driving histories)
  • Number of boats and planes
  • Amount of existing liability coverage you have before adding the umbrella policy

The good news is that umbrella policies tend to be relatively inexpensive, because the severe occurrences that trigger them are uncommon.

The upshot

If you don’t have an umbrella policy, run—don’t walk—and get one. If you do have an umbrella policy, make sure you are sufficiently covered—and boost that coverage amount if you’re not.  

Contact your financial professional at Chastain Wealth to discuss covering yourself against these types of risks, such as through insurance, or for advice about your other risk, investment, estate planning and wealth transfer strategies.

This report is reprinted with permission from VFO Inner Circle. This information contained herein is accurate to the best of the publisher’s and authors’ knowledge; however, the publisher and authors can accept no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof.