Is it Time for an Umbrella Policy?
- Marc Lowe
- 2 days ago
- 5 min read
I have talked to multiple families this month who have run into issues with their homeowners' policies. The funny thing about those issues is that insurance is usually the last thing on people's minds when it comes to finances. They tend to focus on their investments and rightfully so, I call that the "offense" of their plan. What about the "defense" though? I am referring to Insurance when I say "defense". If you are watching the World Cup and catch any of my beloved Brazil games, you would see the importance of defense as theirs has much improved since the previous World Cups.
Homeowners insurance is tricky in certain areas, like where I am located in Southeastern CT. Homeowners along the coast have a strong chance of falling into those dreaded "flood plains" where national insurance companies are set on NOT insuring.
Auto insurance is a form of "defense" that is often overlooked, and yet this gets even more important of an area to cover as your wealth builds over time. Your assets can become huge targets for those who are hit by you in an accident.
Increasing the personal liability coverage limits on your auto and homeowners insurance as your income & wealth grow is important, and you probably know to do that. But there are limits to how much personal liability insurers will cover as part of these asset-specific policies. That's where an umbrella policy comes in!
An umbrella insurance policy protects your current assets and your future income against financial claims for injury brought against you, your family members, or other members of your household. It isn't a standalone policy. Instead, it provides excess liability coverage on top of your existing insurance policies and only becomes active once the underlying policy limits have been exhausted.
Because umbrella coverage serves as a secondary layer of protection, it can be more affordable than many people expect.
Umbrella policies can also be flexible and customized to include many different types of coverage, making them especially useful for today's active and increasingly online lifestyles.
It's Not Just About Your Assets—It's About Your Litigation Risk
Umbrella policies were once viewed as something only very wealthy individuals needed to protect high-value assets.
A better way to think about umbrella insurance is not in terms of the assets being protected, but in terms of your potential exposure to lawsuits.
Certain activities, investments, and lifestyle factors can increase your personal liability risk, including:
Property ownership
Renting out investment properties
Employing household or maintenance staff
Having higher-risk features such as trampolines, hot tubs, swimming pools, climbing walls, or fire pits
Hosting large social or hospitality events
Pet ownership
Coaching youth sports
Hunting, fishing, boating, skiing, or other recreational activities
Maintaining a public presence both online and in person
While many of these activities are covered to some extent by existing insurance policies, what may not be fully covered is the cost of defending a lawsuit or paying a significant judgment or settlement.
In some cases, legal costs and damages can exceed your current assets and put your future earnings at risk.
Umbrella policies can also be written to cover certain risks that may not be covered by any other insurance policy. In those situations, the umbrella policy may include a deductible similar to a traditional insurance policy.
What Does an Umbrella Policy Cover?
Umbrella insurance generally provides coverage in three broad areas:
Bodily Injury Liability
Coverage for injuries to others caused by:
Automobile accidents
Boating accidents
Pet-related incidents
Accidents occurring in your home involving guests
Property Damage Liability
Coverage for:
Damage you cause to another person's property
Claims related to that damage
Damage caused by your child to school property
Personal Injury Liability
Coverage for claims involving:
Slander
Libel
False arrest
Malicious prosecution
Mental anguish
Emotional shock
The first two categories are relatively straightforward. However, personal injury liability has become increasingly valuable in today's digital world. For example, individuals have successfully been sued for posting negative online reviews or making statements on social media.
For many families, an umbrella policy can serve as an effective risk management tool while providing valuable peace of mind.
How Much Coverage Do You Need?
Determining the right amount of coverage starts with evaluating both your current assets and the financial value of your future goals.
These goals may include:
Funding a child's education
Pursuing additional education yourself
Starting a business
Building an investment portfolio
Collecting art or other valuable personal assets
Achieving long-term retirement objectives
It's important to note that certain assets may already receive legal protection.
Employer-sponsored retirement accounts are generally protected from civil lawsuits, and up to $1 million in IRA assets may also receive protection under federal law.
Additionally, depending on your state, homestead laws may protect some or all of the equity in your primary residence from certain civil judgments.
How Expensive Is Umbrella Insurance?
Because umbrella coverage only applies after underlying insurance coverage has been exhausted, claims against it are less common. As a result, the cost is often surprisingly reasonable.
A $1 million umbrella policy will typically cost between $200 and $400 per year.
Additional coverage is often available at a lower incremental cost, meaning each additional $1 million of protection may cost less than the first.
You may also be able to reduce costs by having the same insurance company provide your homeowners, auto, boat, and umbrella coverage.
Bundling policies can also simplify administration by:
Aligning policy renewal dates
Reducing the risk of coverage gaps
Ensuring underlying policy limits meet umbrella policy requirements
For example, if you switch auto insurance carriers and unknowingly reduce your liability limits from $250,000 to $100,000, you could create a coverage gap that leaves you exposed.
The Bottom Line
Umbrella insurance can be a valuable tool for keeping your risk management strategy aligned with your growing assets and evolving lifestyle.
The right coverage can help protect both your current wealth and your future earning potential while allowing you to focus on enjoying life with greater confidence and peace of mind.
As part of your annual financial planning review, it's worth evaluating your insurance coverage to ensure you have the appropriate types and levels of protection
in place. Like any financial decision, insurance should be viewed within the context of your overall financial picture and long-term goals.
About the Author
Marc Lowe, CFP® is a fee-only fiduciary advisor based in Waterford, CT, helping small business owners & families make smarter financial decisions.
The information presented in this article is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services offered through In The Money Retirement, an investment adviser registered with the state of Connecticut. The information linked to on third-party sites is being provided strictly as a courtesy and convenience. We make no representation as to the completeness or accuracy of information provided at these websites. When you access these websites, you are leaving our website and assume any and all responsibility and risk for use of the web sites you are visiting. The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. This work is powered by Advisor I/O under the Terms of Service and may be a derivative of the original.
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