Accidents can happen to anyone. That’s where umbrella policies come into play. An umbrella policy protects your existing and future assets (like wages and inheritance) against the risk of losing a lawsuit over an accident.
You can find yourself in a lawsuit if someone gets seriously hurt in a car wreck or in your swimming pool that one time you rented your house for extra income. If you lose the lawsuit, you would probably have to pay for medical expenses and lost wages, which can quickly become extremely expensive. However, an umbrella policy is designed as extra coverage on personal liability exposure.
Therefore, if you haven’t reviewed your policy in a while and plan to open yourself up to potential liabilities in your retirement, it’s best to account for those changes. You should make sure your home, auto and umbrella policies are up-to-date, if you experienced or planned for big lifestyle changes like buying a new house, car, or if your spouse passed. Having an umbrella policy in your retirement can help protect your savings and assets.
How Do Umbrella Policies Work?
Umbrella policies usually cover bodily injury, property damage, libel and slander claims, and legal fees. The umbrella policy picks up where your auto and homeowner’s insurance policies end. It has a high deductible because the deductible is designed to be met by your other insurance policies. Usually, if you bundle with your other coverage, you will save money on premiums.
For example, let’s say your auto insurance covers $200,000 of medical expenses per accident, and your umbrella policy covers up to $900,000. If you are sued for $800,000, your auto insurance would pay $200,000, and your umbrella policy would pay the remaining $600,000.
Be sure to coordinate your coverage correctly and work with your insurer on recommended coverage. If you buy less than the recommended coverage and purchase an umbrella policy on top, you may come up short if your home or auto coverage is low.
Additional Benefits of Umbrella Policies
With umbrella policies, legal expenses are covered on top of the policy amount. The insurance company may use its own legal team, which could be a better legal team than you could afford on your own.
Please be aware that umbrella policies do not cover criminal and intentional acts, such as drunk driving, medical malpractice, harassment or discrimination. If you are concerned about a specific situation happening, ask your insurance agent if the umbrella policy covers that particular situation.
Why You May Need an Umbrella Policy
If you feel that your personal liability is exposed to potential lawsuits, it’s always best to put yourself at ease with extra coverage. An umbrella policy can protect you from dipping into your retirement assets from unpredictable events that may happen in your future. For instance, if you decide to one day make extra income by renting out your house or property for vacationers, you may open yourself to potential liabilities if an unexpected accident were to happen on your property. By having an umbrella policy, it can help pay for costs that arise from potential lawsuits or claims.
Not sure if you need one? Here are some criteria that indicate you may need an umbrella policy:
- Your net worth is more than $500,000
- People know you are wealthy
- You are vulnerable to lawsuits
In addition, here are some factors that make you more likely to be sued:
- Having a long commute
- Driving during rush hour every workday
- Having a dog
- Keeping a gun in your home
- Owning a swimming pool or trampoline
- Owning a business
- Owning a vacation home or rental house
- Coaching youth sports
- Having frequent guests and events at your home
If none of these fit your lifestyle or criteria, you probably do not need umbrella insurance.
Deciding how much coverage you need depends on the amount of assets that you wish to protect and the potential impact of losing those assets. In general, it’s always best to speak with your insurer so he/she will guide you through the coverage amount. Similar to how you would shop around and compare home and auto insurance quotes, you should do the same for an umbrella policy. You can always negotiate and leverage those quotes with your current insurer to get a better rate.
How Much Does an Umbrella Policy Cost?
Expect to pay about a few hundred dollars per year for an umbrella policy. On average, an umbrella policy with $1 million in coverage costs around $150-$300 a year. The price will go up if you have a low credit score and/or certain lifestyle factors, such as owning a dog, owning a boat or motorcycle, having a job that involves a lot of driving, and having a poor driving record or previous lawsuits.
Usually, you’re required to carry a certain amount of auto and homeowners insurance before you can buy an umbrella policy. You may need to increase the liability limits on your homeowner’s and auto policies, which can increase costs.
Some umbrella insurance carriers require you to have your auto and homeowner’s insurance with them before they offer you an umbrella policy. Sometimes having all of your insurance with the same company can save you money, but that’s not always the case, so you’ll need to carefully review the prices with all three types of coverage in mind.
Coverage Based on Your Retirement Assets
Keep in mind that employer-sponsored retirement accounts like your 401(k) and/or IRA are protected from most lawsuits under federal law. However, your IRA account (not rolled over from an employer-sponsored account) and home equity may not be protected by your local state laws. It’s best to review your local laws before deciding how much coverage you need.
An umbrella policy is designed to protect the money that you have saved for retirement, so you won’t have to lose your income if you get sued for an accident. It’s something you hope to never have to use, but still good for your financial security and peace of mind.