So, who needs an umbrella policy? Everybody!
I can see you all shaking your heads in disagreement with me, but think about it. Who expects to have an accident? Who expects to nod off at the wheel and drift into the path of an 18-wheeler transporting hazardous waste? Who expects to run into a school bus filled with children? Parents send off their teenage drivers with stern warnings not to text and drive, never expecting to receive a call from the police informing them that teen has just rear-ended a minivan with a family of five inside. Think of the recent college graduate with hand-me-down furniture, a little apartment and an older model car, but who has huge earning potential – do you think if they become legally liable for a loss there won’t be a judgment that attaches future earnings?
Let’s face it, even those of meager means have assets to protect, but usually it will comes down to a question of affordability. However, umbrellas pack a big coverage punch for a very modest premium. A $1 million umbrella for a home and two cars may cost as little as $14 per month. For that $14 per month, you can get $1 million of protection. That sounds like a pretty good deal.
If you have not reviewed your limits of liability lately, please take time to look at your insurance policies and discuss the possibility of increasing your liability limits with your insurance professional (or me).
Many years ago, I sat in a board room with a large business client in Salt Lake City to review their upcoming insurance renewals. The room was filled with several people, including owners, managers, and the client’s outside attorney. Frankly, as a young insurance broker, I felt a little nervous (even timid) about the situation, but the nerdy part of me was über confident I new my stuff. As we were reviewing insurance liability limits, the President of the company asked,
“How much liability insurance do we really need?”
All of the sudden, without my crystal ball, I was feeling unprepared to answer the question. After all, in all my years as an insurance geek, I still have yet to come across a reliable formula to determine the answer to this question. Then, it hit me. I responded, “I think this question is well-suited for your attorney. What would he advise?” The company President turned to his attorney and asked the same question. The attorney responded, “Jon, how much liability insurance can you get?”
I know it might sound crazy, but I think the attorney’s response was pretty darn good (and also protected his own butt). Frankly, any professional who claims to know how much liability insurance one should buy or who knows the formula for determining those limits is wrong and possibly even guilty of malpractice – unless, of course, they have a time machine and know what the future holds. Seriously, it would be like your financial planner telling you exactly what Apple stock will be selling for two years from now. Keep in mind that no one can predict how much one would be required to pay if one were involved in an accident that injured another.
Frequently, I am asked by clients how much liability insurance they should have. This question inevitably comes up with someone who has an umbrella policy or is considering one in order to increase their liability limits above those available on basic homeowners, personal auto, and business insurance policies.
In researching this topic with some reputable sources, I discovered the final answer to this question seems to frequently be: “consult with your financial/insurance professionals and/or attorney.” So, yeah, that was helpful for me as an “insurance professional.” I guess this means whatever I (or any other professionals) say must be right – until I’m hauled into court for giving bad advice.
A common starting point in determining how much Umbrella or other liability coverage may be desired is net worth. To calculate net worth, add the value of everything one owns (including home, investments, bank accounts, and retirement accounts). Then, from that amount, subtract any liabilities or debts. The resulting number is one’s net worth. This is the total amount of liability coverage (including Umbrella limits) someone may want to purchase. Furthermore, one should consider their current and expected income. Higher limits of liability may be desired for a higher current or expected income.
There is no precise formula that can calculate the exact amount of liability insurance you might need. As with most insurance decisions, the amount of insurance that is right for you depends greatly on your individual risk tolerance. But, the more you have to lose, the more liability coverage you will want to purchase.
Jon Jepsen, CIC