There are two important aspects to wealth building. The first is investing so as to grow your assets. The second is to protect those assets through insurance and other means. For example, you probably have homeowners and auto insurance. These help protect your assets should you have a car wreck or if there is damage to your home. There’s another kind of insurance that’s very important for many of us. It’s called a personal liability umbrella insurance or just umbrella insurance. It basically increases the liability coverage of your auto and homeowners insurance and also covers some things that they don’t cover.
Do You Need It?
If your homeowners and auto insurance liability coverage are less than your net worth (this is true for most of us), then this supplemental insurance is a great idea. (When you make this calculation, remember that 401(k) investments are federally protected and that in Colorado, IRAs and Roth IRAs are also protected from lawsuits.) Here’s a list of some of the reasons to have it:
- You have significant investments.
- Your home is high value.
- Your recreational items carry risk – swimming pool, trampoline, speed boat, etc.
- Your kids are just learning to drive.
- You own rental properties.
- You frequently have household guests and/or host parties.
- You are particularly at risk for libel and similar lawsuits.
- You volunteer on the board of a nonprofit agency.
- You’re a Little League or other coach.
- You like to travel internationally.
How Much Do I Need?
Simply take your net worth and deduct the coverage you already have from you other policies and you’ll have a ballpark figure for the size of your umbrella policy. It is typically offered in $1M increments. Many companies have limits of $5M or less although some major insurance companies decide limits on a case-by-case basis.
What Does It Cost?
This varies depending upon the risk you present. It can vary by location and personal characteristics (for example, maybe you have an aggressive type of dog). Currently, the average cost of $1M of insurance is about $380/year. The cost per $1M decreases as you buy more. For example, $5M coverage costs about $500/year.
What Doesn’t It Cover?
Certain items are not covered by an umbrella policy. Examples of these include:
- Injury to you or a household member.
- Damage to your property.
- Business liability (you’ll need a business umbrella policy for that).
- Contracts that you have entered into.
- Certain dog breeds.
- Sometimes, certain kinds of watercraft.
Naturally, there are many details associated with umbrella insurance. For example, generally it must be purchased from the company that supplies your homeowners and auto insurance. If you would like to assess your liability insurance needs, or discuss any other financial matter, we can set up a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.