Is it worth buying an Umbrella?

Many of my friends have worked hard to build a solid financial base and many are setting up a retirement nest egg. How painful it would be to see that taken from them after an “accident”. Accidents do happen. We don’t have to be driving drunk or recklessly to cause an accident.  You could be driving home in an ice storm and crash while navigating the roadway.  Perhaps morning sun glare or the brilliance of the setting sun blinds you to a school bus discharging children. A momentary distraction is all it takes.

Regularly customers approach me with the misconception that someone you cause to be injured—whether at your home, by a power boat, camper, or through an auto accident—must settle for the insurance policy limits you have after a loss that you have caused. If that were the case, the State’s minimum auto insurance limits would be the same for everyone; there would be no need to carry higher limits. How would a person seriously injured in an accident pay their medical bills? Who would compensate them for their lost wages?  Would there be any value placed on a person’s pain and suffering resulting from their injuries?  Who would be responsible for lifelong medical care that a paralyzed child will need in their life time?

Reality is the courts look to compensate victims of accidents no matter whether from the deep pocket of an insurance company or from the loose change in your pocket. If your insurance limits are inadequate to compensate your victims the remainder of your assets will be up for grabs. Stocks, bonds, and any other savings are the first to go.  Your retirement funds are an easy grab. Your home and car may be off limits until you go to sell or trade them. You generally cannot declare personal bankruptcy for injuries you cause another to experience through negligence. You could find working well into your retirement years to pay for a moment’s lapse of attention.

Have you ever been walking on a stormy day under a sturdy umbrella and notice how others are running past you trying to minimize the adverse impact of the weather. The bigger the umbrella you are holding corresponds to your level of protection against the elements. It may not prevent you from experiencing any discomfort, but that umbrella sure does determine how wet you end up.

That analogy applies closely to insurance. Like the umbrella that helps protect you in a storm, a personal insurance umbrella provides a canopy of protection over each of your individual insurance policies.

When people come in to buy insurance they are looking to protect themselves from the devastating impacts such an accident could have on their financial security. Auto liability limits legally may be as low as $25,000 per person injured, $50,000 for all those injured, and $25,000 for the property that is damaged; abbreviated as 25/50/25 (removing the “000”). There is no chance those limits will be adequate for this scenario. Usually today, the limits are 100/300/100 or 250/500/100, and then supplemented with an umbrella policy. For the common accident those base limits will likely be adequate. But when one or more people sustain serious injuries, either the Umbrella policy will be needed, or you can watch your personal assets evaporate.

Too often we are lulled into a false sense of security because: we have insurance, we’re safe drivers, and we don’t do wild and crazy stuff. The problem comes when we fail to evaluate if the limits chosen are adequate for the potential losses our activities. It’s hard for the average person to imagine really needing more insurance, and even tougher spending the extra money that it costs. When people decide to increase their liability limits, there is usually an event that prompted this change.

Some people may decide to increase their auto liability limits because they have a teenage driver. Some will increase their homeowner policy because they have a swimming pool and kids. Having appropriate limits for your high exposure activities is important without losing sight of all the respective policies your have and the loss potentials. You may have separate policies for your homeowner, auto, boat, vacation home, rental property…  Each of those policy limits apply only to the liability intended by the respective policy. They do not combine to collectively give you a larger pool of money to draw from following a loss. That collective pool is provided through the purchase of an umbrella policy.

The cost of an umbrella has many variables that affect the price. Those variables include: the number of cars on the policy, the age and number of drivers, the number of properties owned, and your family’s violation and loss history.  A family that owns their home, has 2 cars, and 4 drivers can expect their umbrella to cost $20-40 a month.

Can you afford not to buy an umbrella?