Insurance is often described as protection for a rainy day. If you really want to protect yourself against the worst rainstorms, maybe what you need is an umbrella.
Umbrella insurance is personal liability coverage that extends beyond the limits of your homeowner’s and auto insurance policies. A common minimum amount is one million dollars, with amounts up to five or even ten million not that unusual.
Umbrella insurance is an important asset protection strategy for those who have a net worth of several million dollars and want to protect themselves against frivolous lawsuits or possible sky-high judgments. George Frear, of First Western Insurance in Rapid City, South Dakota, recommends having an umbrella policy that covers at least half of your net worth.
For those who aren’t wealthy, umbrella coverage may at first glance seem excessive or unnecessary. Yet when 
you look more closely at the numbers, that minimum of one million dollars doesn’t seem like so much. For example, the highest amount of liability coverage currently available through standard auto insurance policies is $500,000. Suppose you were in an accident where two new cars were totaled and several people were seriously injured. Just the out-of-pocket costs for medical expenses could easily eat up the $500,000. That’s not even considering the possibility of a lawsuit for damages over and above those costs.
The only possible downside to a large umbrella policy is that it may create exactly the “deep pockets” that make someone more likely to be the target for a lawsuit or a claim for unreasonably high damages. Since judgments are often awarded for the maximum amount of someone’s policy, having an umbrella policy for more than your net worth isn’t necessarily the best option.
On the other hand, of course, someone could certainly sue you for more than your net worth. Nor does the insurance company consider your net worth as a factor in approving the amount of coverage. Policyholders wouldn’t have anything to gain from over-insuring, as they might from insuring a house or other tangible property for more than its value. There isn’t exactly a high risk that someone would burn down his investment portfolio in order to collect on an umbrella policy.
The question of how much coverage you might need through an umbrella policy would be best answered after a discussion with both your insurance agent and your financial planner.
Most major insurance companies offer umbrella policies, and this type of coverage is relatively inexpensive compared to the benefits it offers. You may get discounted rates if you get a policy from the company that already carries your auto or homeowner’s insurance.
Most companies require you to have specific minimum amounts of liability coverage through your homeowner’s and auto insurance policies before you can get an umbrella policy. It is important to make sure you coordinate your policies so you don’t have a gap in coverage. Since the umbrella policy doesn’t kick in until the maximum has been paid on your other policies, any liability between those maximums and the minimum of your umbrella insurance would come out of your own pocket.
I need to express my appreciation to George Frear for discussing umbrella insurance at one of our recent teleclasses. Thanks to his information, I checked my own coverage and discovered I didn’t have an umbrella policy—an omission that I promptly remedied.
I certainly don’t advise clients to carry more insurance than they reasonably need. Having a big enough umbrella, however, is one good way to make sure you aren’t caught unprotected by one of life’s downpours.
