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Umbrella insurance: Financial Protection Everyone Should Consider

A retirement nest egg may make you feel like you've locked down your financial future, but don't get too comfortable. Getting hit with a liability lawsuit in your retirement years could turn your life upside down.

While your insurance may cover some damages or legal fees, an umbrella insurance plan goes further. It protects you and your assets if you are held liable for a claim exceeding the coverage of your other insurance policies. Without such coverage, your assets could be in trouble.

Say, for example, you're five years into retirement and you get into an auto accident. Your car is just a little banged up, but the other driver and his passengers are seriously injured. You're hit with a claim of $1.5 million, but your liability auto insurance only covers $100,000.

If you don't have an umbrella policy extending your coverage, you'll be responsible for $1.4 million. If you don't have that kind of cash on hand, your assets will be seized.

What is an umbrella policy?

Umbrella insurance is liability coverage that goes above and beyond what your homeowners, renters and auto insurance policies provide. Umbrella coverage has higher limits with a broader range of coverage, including claims involving bodily injury, property damage and issues such as libel, slander and defamation of character.

If you're sued or found liable for damages, umbrella policies will pay not only the monetary damage costs, but also attorney fees and other court costs. Having such coverage can prevent another party from going after your assets if damages and legal costs exceed the limits of your regular policy.

It's important to note that employee retirement accounts and IRAs are usually protected under federal laws even if you don't have umbrella coverage, so your retirement account will likely remain safe even if a legal case were to bankrupt you. But as for the rest of your assets? Not so much.



How much should I get?

Typical umbrella policies start at $1 million in coverage and are sold in million-dollar coverage increments. You'll usually need to carry minimum underlying liability coverage on your homeowners or renters policy before you can buy umbrella insurance.

In general, you'll want enough coverage to at least cover your net worth, says Fernandez. Calculate the value of your retirement and other assets you have vs. your debt to determine your net worth. For most, $1 million in liability coverage will be enough; if your net worth is higher, consider bumping up your coverage accordingly.

Before choosing a plan, it's a good idea to sit down with your property and casualty agency to make sure you will be adequately insured in case of a liability lawsuit.

Generally, this type of insurance is relatively inexpensive and I strongly recommend it. If you don’t have a property and casualty agent that you are comfortable with please don’t hesitate to ask us. We can refer you to folks in that arena that we feel very confident will provide you with unbiased advice.

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