By Jane Young, CFP, EA
Personal umbrella liability insurance is supplemental liability insurance that kicks in when other liability policies are exhausted. They do not stand alone and are usually purchased from the company providing your home and auto insurance. You will be required to carry a minimum level of home and auto liability insurance which must be used before the umbrella policy goes into effect.
Most insurance companies require $300,000 in liability on your home policy and $250,000 in bodily injury per person, $500,000 in bodily injury per accident and $100,000 in property damage on auto policies before they will provide umbrella liability coverage.
Umbrella insurance provides you and members of your household with additional coverage for lawsuits involving bodily injury and property damage. Most also provide protection against lawsuits for slander, libel, mental anguish, and false imprisonment. An umbrella policy generally covers legal expenses associated with a lawsuit which may exceed the liability coverage. A lawsuit can cost hundreds of thousands of dollars so a policy with an obligation to defend you in court is a substantial benefit of an umbrella policy.
Personal umbrella policies do not cover personal injuries or property damage to you or your household. They also do not cover liability associated with a business, breach of contract and intentional or criminal acts.
Seriously consider an umbrella policy if you have assets of more than $300,000 and you currently earn or anticipate earning a substantial income. Other factors that increase the need for an umbrella policy include having a swimming pool or trampoline, owning dogs, hiring household staff and participation in potentially dangerous sports. Additional risks include, serving on charitable boards, frequent entertaining and having a public profile or an inexperienced driver in your household.
Umbrella liability is one of the least expensive forms of insurance. Most insurance providers start coverage at $1 million and go up to $5 million. Premiums typically run about $150 to $300 per year for $1 million in coverage, according to the Insurance Information Institute. A policy for around $1 to $2 million is reasonable for most who have assets of several hundred thousand dollars or more - judgements over $1 million are rare.
The amount of coverage needed depends on the value of your assets, your risk factors, and the potential loss of future income. You should carry at least enough to cover one to two times your taxable net worth, including your home, and potential loss of income.
Assets held by an employer sponsored retirement account such as a 401(k) or 403(b) are protected under the Employee Retirement Income Security Act of 1974 (ERISA). IRA accounts that are rolled over directly from an employer sponsored plan carry the same protection.In addition to personal umbrella liability insurance, consider errors and omissions Insurance, commercial liability insurance and directors and officers liability insurance for your business and non-profit activities.