Need an Umbrella?

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    Jessica Beam DeBold, CFP®, EA
    Senior Financial Planner

    No, we are not getting into the business of predicting the weather, but an umbrella insurance policy is something that you might consider for a “rainy day”. What is a personal umbrella insurance policy? It is a secondary type of insurance that provides additional liability insurance over and above what you carry on your home or automobile coverage. This type of policy is typically inexpensive to add on to your existing coverage and provides a layer of protection that we often suggest to our clients. According to the Insurance Information Institute 1, $1,000,000 of coverage ranges in cost from about $150 – $300/ year.

    In order to purchase an umbrella policy, the provider will typically require you to have a specified base amount of liability coverage. This commonly ranges from $150,000 – $250,000 for your auto policy and $250,000 – $350,000 for your homeowner’s insurance policy. The umbrella policy would then cover occurrences above your stated liability and can be purchased for $1,000,000 and up. Some examples of when this type of liability coverage might be needed include:

        • Someone is injured at your home (dog bite, drowning in pool, falling off steps)
        • You are at fault in an auto accident
        • A tenant in your rental is injured on your property
        • You are involved in a libel/ slander lawsuit
        • Legal fees associated with any of the above

    Whether or not you need an umbrella policy is dependent upon several factors including:

    1. What Assets Do You Have Today?

    If you add up all your assets (retirement accounts 2, home 3, vehicle, bank accounts, etc.), how much of that would you be willing to lose in the event of a liability settlement? Most of you would likely answer “none”. This is when an umbrella insurance policy would come in to play. One common method of determining how much coverage you need is based on your total assets. Total assets should not be confused with net worth. For this calculation, your debt should not come into consideration. For example, if your total assets are $1,500,000 and your base liability coverage on your auto or homeowner’s insurance is $250,000, you may want at least $1,250,000 in umbrella coverage.

    2. What Is Your Earnings Potential For The Future?

    What if you are a 30-year-old without significant assets, but with a large future earnings potential? If you were at fault in an auto accident and sued for $1,000,000 but you don’t have assets equal to that, what might happen? One possibility is that your future earnings may be garnished until your settlement is paid off. This is another example of where an umbrella insurance policy would be valuable. One common methodology here is to use a multiplier on your current income. For example, if your earnings are expected to be $75,000/ year and you used a 5X multiplier, you would arrive at $375,000. This earnings multiplier amount would need to be added on to your asset-based calculation.

    Footnotes

    1. Insurance Information Institute; https://www.iii.org/article/what-umbrella-liability

    2. There is some liability protection for certain types of retirement accounts that may be able to be excluded from your asset calculations, please discuss this with your financial planner.

    3. Most states do provide homestead exemption meaning a portion of the equity in your home may also be excluded from this calculation. The 2019 Ohio exemption amount is currently $145,425 per Ohio Rev Code 2329.66(A)(1).