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Insurance

An Overview of Umbrella Insurance

Umbrella InsuranceBuying Umbrella Insurance is a Little Like Laying Up at the 1999 British Open

Umbrella insurance is to the average retiree what laying-up would have been to Jean Van de Velde at the 1999 British Open. Van de Velde’s gaffe on the final hole was remarkable, and if you watched it live, you may even cringe at the remembrance. Ahead by three strokes, his aggressive tee shot averted danger with a lucky bounce. Instead of electing to play two relatively easy, short iron shots into a very difficult 18th green, he attempted to reach the green with a two iron over water – one of the most difficult shots in golf.

Holding a three shot lead, Van de Velde had no reason to play aggressively. The winner receives the same victor’s trophy and monetary prize, regardless of whether he wins by three shots, two shots, or one shot. Van de Velde could have played conservatively and protected his lead, but he lost the tournament with unnecessarily aggressive play.

For those (especially retirees) who have substantial resources, taking out umbrella insurance is the safe play and is generally what we advise for clients who have more than $500,000 of net worth. Most of our clients have saved for a lifetime to arrive at the point where paid work is optional. Yet we often sit down with potential clients who have never heard of umbrella insurance. Annually paying a few hundred dollars for umbrella insurance will rarely have a significant impact on their capacity to achieve their financial goals, but the additional liability coverage that umbrella insurance provides can have a tremendous impact in the event that an accident should happen.

What is Umbrella Insurance?

Umbrella insurance covers you for liability that goes above and beyond your auto and homeowners insurance. Umbrella insurance coverage begins where other policies end and can extend the coverage by millions of dollars. Umbrella insurance protects you from other’s claims of bodily injury, property damage, slander, libel, and mental anguish among other things. As you might expect, umbrella insurance does not cover intentional acts, punitive damages, or business activities.

If you cause a multi-car collision on I-40, your dog bites a toddler, your handyman falls off your roof, or a tenant slips on your sidewalk, your liability coverage may not be enough. If you are a little-league coach, participate in sports where you could easily hurt others (skiing, boating, hunting, etc.), or serve on a charitable board of directors, you may face liability that you have not considered. The reality is that those who have saved assets are significant targets for lawsuits because suing someone without assets makes no sense. By contrast, those who have saved significant assets bear a heightened risk for all lawsuits, especially those that are frivolous.

Representing yourself is not a good option (kind of like Van de Velde’s two-iron). To do it well, you would have to understand both the legal process and have the time to defend yourself. Even against a meritless lawsuit, you still have to build your strategy, file requests for documents or admissions and respond to the other side’s demands. Legal discovery, depositions, interrogations, subpoenas, and court motions are not something that the layman should haphazardly figure out in process. Going it alone is not an option. Paying fees to defend yourself gets expensive quickly. Even frivolous lawsuits can cost hundreds of thousands of dollars to defend. Having an insurance company with an obligation to defend you in court is the primary benefit of umbrella insurance. For those with assets sufficient to make them a target for lawsuits, umbrella insurance is the answer.

Who Provides Umbrella Insurance and What Does it Cost?

You can purchase umbrella insurance through your home and auto insurer. If you have policies with separate institutions for your home and vehicle(s), the insurers may not be willing to sell you umbrella insurance. Most insurers want to either provide full umbrella coverage or none at all.

The cost of $1 million of liability coverage is usually between $200 and $300 annually. Each additional $1 million of umbrella coverage generally costs between $150 and $250 annually. If you have a teenage driver in your home, own an RV, or have a dog of certain breeds deemed aggressive, your liability coverage may be more expensive.

How Much Is Enough?

Having a monetary amount of coverage that equals your assets is not necessarily a good rule of thumb. If you have $1 million in assets and $1 million in umbrella coverage, a $2 million judgment will decimate you. After all, one study suggests that 13% of personal injury and liability judgments are north of $1M.

My rationale is that the first $1 million coverage will cover all of the nuisance lawsuits that you could face. This coverage is important and the most likely that you would need. However, you may want to consider having at least $2 million in coverage because the next $1 million of coverage will protect you against a judgment or settlement for more than $1 million but less than $2 million.

I am not usually a fan of insurance. If you have the assets and are effectively self-insured, I generally advise you to avoid buying insurance. It is worth remembering that insurance companies, on average, make money. At the same time, you want to avoid allowing a single accident or event to wipe out your life savings.

Summary

Van de Velde played brilliant golf for 71.5 holes, all to lose the British Open on a bad, entirely unnecessary shot. Van de Velde should have played it safe and taken an extra stroke on the way to victory, and we advise most of our clients who have $500K in assets or more to do the same. Pay a little bit for umbrella insurance to protect yourself against a devastating judgment.

Securities offered through Securities Service Network, LLC, Member FINRA/SIPC. Fee based advisory services offered through Retirement Planning Services, LLC, a Registered Investment Advisor. Past performance does not indicate future results.