So far in the Financial Planning 101 series I have discussed multiple types of insurance coverages you can get to cover your things and your family. In this installment I will cover a type of insurance coverage that you may have heard about and hopefully you have but in many cases people either don’t have it or certainly don’t have enough and that is personal liability coverage or an umbrella policy as it is commonly referred to.
Liability insurance provides coverage for you when you are deemed at fault in some sort of accident or incident they come after you for damages or file a lawsuit. This can be the result of a car accident, someone getting injured at your house or by your pet, or as the result of some other act of a member of your family. The damages people could seek might be for medical expenses but could also be more comprehensive depending on the situation and depending on the severity of the injury or worse, in the case of death.
As discussed in earlier installments on home and auto insurance there is an element of liability coverage included in both of those types of policies. That said these policies usually include a limited amount of liability coverage. This amount is generally sufficient to cover standard medical bills and property damage but in the case of something more severe would most likely come up short. For instance, an automobile policy might typically contain $300,000 in liability coverage. If there is a worst case situation where someone ends up disabled, with long term medical care needs or death as a result of an accident the $300,000 won’t cut it. Any damages you are found responsible for beyond the $300,000 in coverage would then come out of your personal estate. This could mean they can come after your life savings to make good on the damages.
This is where the Umbrella policy comes into play. An Umbrella policy is meant to provide protection for you against liability damages and provide much greater amounts of coverage than found in typical home and auto policies. Umbrella policies are typically sold in increments of $1 million. The best part is these policies provide the most coverage for the dollar of any common insurance product. Assuming you aren’t in a high risk situation you may be able to get $1,000,000 in coverage for under $200 per year. That’s right, per year, not per month.
Many Umbrella policies won’t kick in unless you have a stated amount of liability coverage in your auto or home policies so you will need to make sure you have the proper amount of coverage
A good idea is to determine what your net worth is by using readily available online tools from places like Nerd Wallet, Kiplinger’s or on our site at 7th Street Financial. The safest thing to do is to get enough coverage to cover your net worth. Your net worth will change over time so make sure you stay on top of this and periodically update your coverage amounts if needed.
Let’s be honest, insurance products aren’t sexy but they serve a critical role in your overall financial picture. Hopefully you never need to actually use the insurance products you have because that generally means something bad has happened but insurance is there is to save the day when things are at their worst. My firm doesn’t even sell insurance products but as a Financial Advisor it’s my job to talk to clients about protecting what they have and I would advise almost any client to pick up this type of policy due to its ability to protect your estate at such a reasonable price.
Hopefully this was informative and gives you something to think with your own personal situation. If you would like to talk about this topic or any other aspect of your personal finances click this link to schedule a free discussion with me.