Maybe it’s the zip line you put up in the backyard, hoping to provide some fun and exercise for your grandkids and their friends. Or the times when you rent your home as an Airbnb. Perhaps it’s because of your position serving on a local nonprofit or even posting a negative review of a local restaurant.
Insurance is made for the unexpected in life, but you may not realize you don’t have enough liability coverage until something catastrophic happens, especially the situations you never thought to anticipate. The neighbor’s child falls from your zip line and breaks his arm, requiring extensive surgery. Your Airbnb guest slips on your stairs. Your nonprofit gets sued, or that restaurant you didn’t like hires a lawyer.
Consumers are often surprised by circumstances that can lead to their personal liability exposure, as well as the extent of that exposure, says Elyse Foster, a financial planner with Harbor Wealth Management, in Boulder, Colo. And they sometimes also wrongly assume their home insurance or auto insurance would be enough to cover their expenses if accidents happen or they get sued. “You really need to be prepared,” she says. “People often think, ‘I don’t have enough money. No one’s going to come after me.’ But they will, and they do.”
One option for liability worries is umbrella insurance, which is extra coverage that some consumers don’t realize is available, says Neil Brown, a wealth manager with Burkett Financial Services, in West Columbia, S.C. Umbrella policies are relatively cheap, with a typical annual cost of about $150 to $300 for each $1 million of coverage. The coverage kicks in after home or auto liability limits are exhausted. You typically buy a separate umbrella policy from your current insurance carrier for extra liability protection beyond your existing home and auto policies. Standalone umbrella policies are not common, but you may find one by shopping around.
People tend to understand insurance when it comes to something tangible, such as their car, but replacing or repairing their financial well-being can seem like an abstract notion, says Sean Scaturro, USAA’s advice director. He had a former client, a woman in her eighties, who declined to buy umbrella insurance and hit the gas instead of the brake while driving, racking up at least $350,000 in medical claims after injuring a young woman. That put all her assets, including her emergency cash and home equity, at risk. “This insurance provides more of that peace of mind that insurance is designed to do,” he says.
Usually bundling an umbrella policy with your other coverage will save you money on premiums, but be sure you coordinate all your coverage correctly, Brown says. Say your insurer recommends you have $300,000 worth of liability coverage on your home and auto, but you only buy $100,000 and then purchase a $1 million umbrella policy on top of that. If you are liable in a multi-car accident and you get sued for $1 million, your umbrella policy may only pay $700,000. If you had the recommended $300,000 coverage on your other policies, you wouldn’t have come up short, Brown says.
Umbrella policies are widely available through major insurers, so you can shop around to compare prices and coverage limits. USAA, for example, sells a $1 million umbrella policy with a cost of about $19 a month, Scaturro says. You can buy up to $5 million of coverage directly through USAA and the company can potentially partner with a third party for a policy with higher limits, he says.
When weighing whether to buy umbrella insurance, start by reviewing your home and auto liability coverage. Then, consider how much extra coverage you need to ensure that your combined liability coverage covers your total assets. Ask your current insurer how much it would charge to add umbrella coverage.
Be aware that if you pile up several speeding tickets or have other changes to your risk profile, you could lose your coverage. Also, if you add to your possible risks, such as putting in a pool, you need to update your insurer. If you don’t, you may not qualify for coverage if something happens.
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