An umbrella policy: One of the most important insurance policies you may never think about
When people think about protecting their wealth, they often focus on growing their investment portfolio, reducing taxes or updating their estate plan. Those are certainly important pieces of a comprehensive financial plan.
However, one of the most valuable and frequently overlooked tools for protecting wealth is surprisingly inexpensive: an umbrella liability insurance policy.
In our practice, we routinely review investment portfolios that represent a client's life savings. Yet it is not uncommon to find clients with only the minimum liability coverage on their homeowners or automobile insurance. A single lawsuit could put years of hard work and financial success at risk.
Fortunately, there is a relatively simple solution.
What Is Umbrella Insurance?
An umbrella insurance policy provides additional liability protection above and beyond the limits of your homeowners, automobile, and, in some cases, other personal insurance policies.
For example, suppose you are involved in an automobile accident and are found legally responsible for injuries that exceed your auto insurance liability limits. Without additional coverage, your personal assets could be exposed to satisfy the remaining judgment.
An umbrella policy is designed to provide an additional layer of protection once the liability limits on your underlying insurance policies have been exhausted.
Depending on the policy, umbrella coverage may also provide protection for claims involving personal injury, libel, slander, defamation, landlord liability and certain other situations not fully covered under standard homeowners or automobile policies.
Who Needs Umbrella Insurance?
Many people assume umbrella insurance is only for the ultra wealthy.
In reality, anyone who has accumulated assets, earns a meaningful income or has future earning potential should consider whether additional liability protection is appropriate.
Individuals who may especially benefit include:
- Business owners
- Physicians and other professionals
- Landlords
- Parents of teenage drivers
- Boat owners
- Individuals with swimming pools or recreational property
- Anyone with significant investment or retirement assets
The more you have accumulated, the more you have to protect.
It Is Surprisingly Affordable
One reason umbrella insurance is often overlooked is that people assume it must be expensive. In many cases, the opposite is true.
A $1 million umbrella policy may cost only a few hundred dollars per year, with additional coverage often available at relatively modest incremental costs. When compared to the potential financial consequences of a large lawsuit, it is often one of the most cost-effective forms of insurance available.
Your Lifestyle May Increase
Your Risk
Many liability claims arise from everyday activities such as an automobile accident, a guest slipping around your swimming pool, a dog bite, an accident involving a recreational vehicle or even something as simple as a social media post that results in allegations of defamation that could potentially lead to legal expenses.
Most people never expect these situations to occur until they do.
Protecting More Than Your Investments
Financial planning is not simply about earning higher investment returns. It is also about protecting what you have already built.
Consider someone who has spent 30 years building a successful business and accumulating investment assets. A significant legal judgment that exceeds standard liability coverage could jeopardize much of that wealth.
For many families, purchasing an umbrella policy represents one of the highest-value decisions they can make because the cost is relatively small compared to the amount of protection it provides.
Review Your Coverage Regularly
As your financial situation changes, your insurance coverage should evolve as well. Many people purchase homeowners and automobile insurance years ago and rarely revisit their liability limits.
Major life events such as starting a business, purchasing investment property, accumulating additional wealth or adding teenage drivers to the household are all good reasons to review your insurance coverage.
It is also important to coordinate umbrella coverage with your homeowners and automobile policies to ensure the underlying liability limits meet the umbrella carrier's requirements.
Final Thoughts
Successful financial planning is not only about growing wealth. It is about protecting it.
While investment management, tax planning and estate planning often receive the most attention, liability protection deserves a seat at the table as well.
Umbrella insurance is one of the most overlooked forms of protection available, yet it is also one of the most affordable. For many families, a relatively modest annual premium can provide millions of dollars of additional liability coverage and tremendous peace of mind.
If you have accumulated meaningful assets or simply want to better protect your family's financial future, reviewing your umbrella insurance coverage may be one of the smartest conversations you have this year.
Reid Schwartz is a columnist for The Item and Co-Founder of Creech Schwartz Wealth Management in Sumter, SC, where he works as a financial advisor helping individuals, families, businesses, and nonprofits plan for long-term financial success.
*Tax and accountancy services are not available through or provided by Creech Schwartz Wealth Management or &Partners, LLC.
This article is for educational purposes only and not to be interpreted as tax or legal advice. Any tax planning strategies discussed by Creech Schwartz Wealth Management will be in conjunction with your tax/legal professional.
Securities and investment advisory services offered through &Partners, LLC, a broker-dealer and investment adviser registered with the U.S. Securities and Exchange Commission and member FINRA, SIPC.