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You Might Need an Umbrella Even if it Isn’t Raining

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In my dealings with military members, I’ve found that most of them do a pretty good job protecting against the big risks in life. They usually have adequate life insurance (when combined with SGLI and SBP), health insurance through TRICARE and protection for their personal belongings (auto, home or renters insurance). It seems that a pretty good percentage miss the mark though when it comes to protecting themselves from liability exposure due to unforeseen events that could cause harm to others. This risk can be transferred to an insurance company through an umbrella policy. Before I talk about what an umbrella policy does, let’s review the concepts of insurance first.

Insurance is most effective and affordable when you insure a risk/peril that is unlikely to occur and will have catastrophic consequences. This is one of the basic underlying concepts of insurance planning. If a risk or peril is likely to occur with catastrophic results the chances are you won’t be able to get insurance to cover the risk/peril to begin with. If you could, it would most likely be very expensive. In this case, you want to avoid the risk or if absolutely necessary take action to mitigate the likelihood that the risk/peril will occur. Military folks understand this one pretty well. When I was in the USAF we called it Operational Risk Management. If the risk/peril is likely to occur but the results are not that bad, then you might want to accept this risk yourself. You can either absorb the cost or perhaps mitigate the risk with safety equipment or some other steps…again, similar to Operational Risk Management. The final combination is low likelihood and low cost. In this case again, we accept the risk. To review, the most efficient place to use insurance is if the likelihood of the risk/peril is low but the results are catastrophic or very expensive. Umbrella insurance meets that criteria. The likelihood that a risk/peril will occur that will lead to a lawsuit is pretty low, but if you are sued it could be very expensive. Win or lose. So, let’s talk about what an umbrella insurance policy can do for you.

Umbrella insurance policies pay for your responsibilities (up to the policy limit) under the law if you are the “cause” of someone else’s injury. The possibilities are endless but the cause could be a car crash, dog bite or someone slipping on your steps. This would most likely lead to an insurance claim and potentially some sort of lawsuit, but it doesn’t necessarily mean you will go to court. Normally speaking, the policy will cover your liability up to a certain dollar amount. Common liability limits are in the range of $1M or more. With that said, an umbrella policy doesn’t start paying until after your liability coverage contained in your auto and/or homeowner’s or renters policy has already been applied. Depending on the policy the umbrella coverage will also include the costs of any legal expenses.

Compared to other insurance coverages, an umbrella policy is not too expensive. It will depend on what you do and what you own. An umbrella policy for someone who owns a breed of dog the insurer considers more likely to bite will be more expensive. Certain hobbies or vehicles could also increase the premium as will teenage children. As with all insurance, umbrella policies have a deductible…of sorts. In the case of umbrella insurance, the deductible is in the form of the liability coverage required on your auto and homeowner’s/renter’s policy. It is typical to see a requirement for $300,000 of liability coverage on the underlying auto and homeowner’s/renter’s policies. So, if you are carrying the state required minimum on your auto insurance (which is a huge risk), you may have to increase that coverage to qualify for an umbrella policy.

Our society becomes more and more litigious every year and we’ve all heard of the large payouts given to some plaintiffs. An umbrella policy will go a long way towards protecting your assets and future income in the unlikely event that you get sued. Give it some thought.


Curt Sheldon is a Fee-Only Financial Planner based in Northern Virginia.  He can be contacted at (703)542-4000, (800)928-1820 or Curt@CLSheldon.com

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The information contained in this blog is for general financial education and should not be construed as individual financial advice.  Please consult your own financial, tax or legal advisor prior to applying any principles discussed here to your own financial situation.