Written by Jessie Serrano
Reviewed by Natalie Slagle, CFP®
Imagine this. You wake up and realize you're already late for work. Your adrenaline is pumping as you rush to get ready and leave the house. You're finally on the road driving to work when you get a text from your boss, “WHERE ARE YOU?!” As you lean over to respond, you hit the car in front of you and cause a three-car pile-up. You’re ok, but your car isn’t. Traffic is building, and several people are coming to you for your insurance information… being late for work is the least of your worries at this point.
Although this is a nightmare from the start, luckily, your umbrella insurance will save the day. Owning umbrella insurance can prevent significant financial loss, (like the stock compensation you’ve been earning over the last few years!) In its simplest terms, umbrella insurance covers beyond what your other insurance policies cover. In this scenario, your auto insurance will cover some of the cost of the damages and potential medical bills of the people involved, but your umbrella insurance will pick up and cover the remainder of the cost. Without it, you (and your investments) may be on the hook for it.
In this blog, you will learn what umbrella insurance is, what it covers, why you should buy it, what it costs, and if it is worth it.
Umbrella insurance is extra liability coverage that can protect you from financial loss caused by property damage or injury to another person. This type of insurance extends past your auto or homeowner’s insurance to protect you from unpredictable situations. It offers an extra layer of protection from accidents caused by you, your spouse, and your children. For that reason, it can be a great tool for Millennial and Gen-X couples building wealth. Umbrella insurance works as an “umbrella” ☂️ to provide additional protection to all of the insurance policies you and your family have.
Umbrella insurance will cover the excess of what your auto, boat, renter’s, or homeowner’s insurance won’t cover. Some of the specific items of coverage include injury to others or damage to possessions. Many policies will also cover liability claims like libel (written defamation), slander (a false spoken statement), false imprisonment, malicious prosecution, wrongful entry, and invasion of privacy.
Although umbrella insurance will cover a wide variety of situations, it will likely not cover your personal injuries or damage to your personal property, criminal action to damage or harm someone else, or liability assumed through contract.
A person should buy umbrella insurance if they have potential assets and future earnings they are trying to protect from liability. This may include your retirement accounts, stock compensation, investment accounts, crypto assets, bank accounts, and future earnings potential. For high-earning Millennials and Gen-Xers, this could be just a simple solution to a potentially BIG problem.
For example, let’s say you have an auto insurance policy that provides the following coverage:
If this person caused an accident with two other people, and one person’s medical injuries were $120,000, another person’s was $400,000, and the property damage was $140,000, they would only be covered for $500,000 in total bodily injury (leaving $20,000 outstanding) and $100,000 for property damage (leaving $40,000 outstanding). This is a gap of $60,000 that you could be liable to pay!
This is the exact type of gap in coverage that your umbrella insurance would fill.
Umbrella insurance is useful if you become liable for more than what your homeowner’s insurance or auto insurance will cover. As you saw in the example above, it will cover the rest of what you owe (your auto or home insurance policy typically pays out first).
Another advantage of having this type of insurance would be the fact that it covers more than just the policyholder. It could also cover your children or others who live in your household. This aspect of the insurance is good to have if you are frequently having people over in your home or have teenage children with a mind of their own...
Other people that may want to get umbrella insurance include dog owners, landlords, coaches for children’s sports, volunteers, and pool owners.
Umbrella insurance could vary between $120 and $300 a year. The difference between those prices depends on information like the insurance company who will provide it for you and what the limits of coverage will entail.
Yes, for the price you pay and the protection it provides, umbrella insurance is absolutely worth it. The reason why the premium is so low is that this type of claim is quite rare. However, when an umbrella insurance policy is needed, it could potentially save all of your previous hard-saved dollars and future savings as well.
An example of how umbrella insurance works:
The following are some scenarios of when umbrella insurance would be put to use:
Umbrella insurance is extra liability coverage that protects you from the unexpected. It is called excess liability coverage because umbrella insurance will cover beyond what your original homeowners or auto insurance covers to prevent you from dipping into your assets or savings to pay for the remainder of an accident or lawsuit. It can cover many possible accidents or situations caused by you, your spouse, children, or other members of your household. Lastly, it is relatively inexpensive, about $120-$300 per year.
In our opinion, we see this as a must-have for most high-earning and/or higher net-worth Millennials and Gen-Xers. If you want to learn more ways to build and protect your wealth, schedule a quick consultation call with us.
Disclaimer: This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.