It could happen to you.

“Betsy” (not her real name, but someone we know) was like any other college student headed home for the weekend.  Her car was stuffed with dirty laundry.  She was longing for Mom’s home cooking.  Dad’s teasing.  Her dog’s sloppy kisses.  And a solid night of sleep in her own bed.  Lately, she had spent way too many nights studying until the wee hours.

When two friends asked for a ride home, she happily agreed.  Company was always good.  Tragically, hours into the drive exhaustion took its toll and Betsy nodded off behind the wheel, crashing her car.  She survived with relatively minor injuries.  But one of her friends was left with serious, permanent and life-changing injuries.

That girl’s parents sued.   And without sufficient insurance and savings, Betsy’s parents ended up losing their home. 

Heartache all around.

Why umbrella insurance is so important

Accidents are no respecters of people. If you’re unfortunate enough to have one (and most of us are), usually you’ll have enough standard car insurance or homeowner’s insurance to cover a claim (once you’ve satisfied your deductible).  You might emerge bruised, but you’ll still be left standing, financially.

On the other hand, if you’re liable for damages that exceed your primary (and only) insurance, as in the case of Betsy’s parents, you may wind up in deep financial trouble, potentially losing your savings, home, other assets, and even future earnings.  It could wipe you out.

An extra safety net

This is why umbrella insurance is so important.  It is an extra safety net.  As a secondary insurance policy, umbrella insurance provides extra protection that goes above and beyond what your standard auto and home insurance covers.  It will kick in once you’ve exhausted the limits of these policies. 

What umbrella insurance covers

Umbrella insurance will cover you when major liability claims are brought against you. Depending on the particulars of your policy, it could protect you if:

• You injure or kill someone in a car accident
• Someone gets injured or killed on your property
• You seriously damage someone’s property
• You’re sued for slander or libel

Who needs it?

Some people are at greater risk of being sued, in which case umbrella insurance provides critical protection.  Consider buying umbrella insurance if:

• You have substantial assets. While the victim (or family) who is injured or killed in an accident may settle for whatever your standard policy limits are, it’s possible they may not stop there, but push for a larger settlement, if they know you have deep pockets.
• You have a high income. Same idea. If victims know they can garnish your wages for more money than what your standard policy pays out, they could pull out all the stops in a lawsuit against you.
• You have a higher risk of being sued. If you are in a high-risk occupation (maybe you’re a surgeon), or if you have things on your property that could hurt people – think trampoline, swimming pool, snarling dog, boat, jet ski, etc. – you have a greater chance of being sued.  Even having young, inexperienced drivers, like your children, on your standard insurance policy could ramp up your risk.  Remember Betsy’s family.

How much do you need?

A tricky question.  A typical umbrella insurance policy provides at least $1 million in coverage.  Generally coverage runs in million dollar increments, starting at $1 million and going up to $10 million or more.  Your own circumstances will drive how much coverage you need, but you will probably want enough to cover your net worth and then some.  Consider these things in your decision:

• Your level of risk. More risk requires more coverage.  Do you drive long distances to work most days?   Your risk of being in a car accident increases with the amount you drive.  Do you let friends or relatives drive your vehicles? Do you have things on your property that could hurt someone (trampoline, swimming pool, pond, aggressive dog, boat, jet ski, etc)?   With any of these, your risk increases. 
• Your net worth. In our sue-happy society, the more wealth you have, the greater your risk for lawsuits.  You may need a larger umbrella policy if you have more to protect.
• Your income. The more money you make, the more vulnerable you are to having your current (and future) wages being garnished as part of a settlement.  If you stand to lose substantial potential earnings, you will need a larger umbrella policy.

How much does it cost?

For the amount of coverage you get, umbrella insurance is pretty affordable.  Premiums are a fraction of what standard auto and home insurance premiums will run you.  Typically annual premiums for $1 – $2 million of coverage will probably range from $150 to $400, depending on what you want covered.  You can buy more coverage, but it will cost more.  Coverage runs in $1 million increments up to $10 million or more, then in $5 million amounts for higher levels of coverage.  The incremental cost for coverage typically decreases with higher coverage limits.

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No matter how careful we are, accidents happen.  Some are costlier than others.  Isn’t it better to safeguard your future and buy an umbrella policy you can afford, than to risk a devastating financial loss that you can’t afford?

To read more on umbrella insurance, click here.

Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.