How Big Should Your Umbrella Policy Be?
Your dog is the sweetest puppy on the planet, but one day, dear Rover goes on the attack and bites your neighbor's kid. You're sure little Tommy provoked him. But Tommy's parents don't care. They sue you for $1 million. Your neighbors have a pretty good chance of winning. According to Jury Verdict Research, 13% of personal injury liability payouts are $1 million and up. Better odds than the lottery.
A personal umbrella policy is the most cost-effective way to protect your net worth. This insurance coverage kicks in if a judgment against you exceeds your auto or homeowners policy limits. Let's say you have a $500,000 liability limit on Coverage E in your homeowners policy. Little Tommy wins a judgment of $1 million. Your homeowners insurance company pays the first $500K, and your umbrella liability company is on the hook for the remaining $500K—all for an average of $150-$300 a year for the first $1 million of coverage. If you own a business, you'll need to buy a commercial umbrella policy at an average cost of about $1,200.
The Savvy 10%
Chubb Insurance Group surveyed 200 households with $1 million or more in investable assets. 10% paid out legal judgments of over $100K. Yet, 90% did not have an umbrella policy. Just 10% of them were savvy enough to buy this type of excess liability coverage. They paid a pittance to protect their considerable wealth.
Most of us mere mortals don't have $1 million to invest. However, umbrella policies are not just for the rich. For many Americans, their house is their largest asset. Yet only about 15% of homeowners have a personal umbrella policy. In part, because insurance agents are not educating their clients about the importance of excess liability coverage. Some people don't understand what an umbrella policy covers. Or, believe they don't have enough to lose. Unfortunately, even a renter without a large savings account can have their future wages garnished to pay a judgment.
Risk is Everywhere
You don't have to be a bungee jumper or a racecar driver to have increased risk in your life. Teenaged drivers, pools, and dogs in your home enhance your likelihood of being sued. According to the CDC, car crashes are the leading cause of death for teens in the U.S. Lest you think your dog is more responsible, 4.7 million dog bites happen each year.
Be sure to check your umbrella policy – some dog breeds are not covered.
Umbrella policies also cover slander and libel suits. If your job includes reviewing people and companies on social media, you are at risk for these types of lawsuits.
It's Crazy Out There
Lawsuits range from the absurd to the understandable. One family settled for $475K for a child who removed her headgear during a paintball game in their backyard. In adherence to Murphy's Law, she was hit in the eye by a paintball at that exact moment. In another case, a student made false statements about her math teacher online. The teacher sued the parents and received a $750K payout. On a much more severe and expensive note, a teenaged babysitter left a 5-month-old unattended in a walker. The baby fell over, hit her head on the floor, and suffered brain damage. An $11 million settlement went to the baby girl's parents.
How much can you afford to lose?
Calculating how big your umbrella limits should involve three key considerations:
- Value of Assets - It may not be enough to cover your net worth. If you own a $500K home, the mortgage value of the house becomes irrelevant if you sell to get back the equity. It's better to include the full amount of your assets in your calculation.
- Risk Assessment - Pools, kids, dogs, and anything else that increases the premium on your homeowners and auto policies should be part of your assessment. While you're evaluating your risk level, consider what you can do to reduce it. You can't get rid of your kids, but you could take down that trampoline in your backyard.
- Risk Aversion - Some people would rather err on the side of being over-insured. Adding 50% to the value of your assets is a good guideline. Since another million in umbrella coverage will cost just $50-$75 dollars a year, it's not a hard decision to make.
Can You Scrape Together 82 Cents a Day?
Folks will fork over big bucks to their accountants to reduce their tax liability, but won't buy an umbrella policy. Yet, for just 82 cents a day, you can protect a million dollars worth of assets from the little Tommies of the world. Order a tall instead of a venti latte once a week to cover it. Peace of mind in exchange for a little less caffeine. Seems worth it.
At your service,