Umbrella Insurance

​​We are passionate about helping our clients grow and preserve their assets.  In the course of our financial planning* for clients we are noticing an absence of umbrella policies, particularly for those who fall into the affluent or business owner buckets.  Hence we have prepared a short summary about umbrella policies including what it is, how to determine your coverage needs and why it is important to your financial security. 

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The most popular and important insurance types for people to buy are health, auto, home, life, and umbrella.  The first four are generally not an issue.  In fact, automobile insurance is a requirement if you own or drive a car.  Homeowners is a requirement from the mortgagor and while not all states require renters' insurance, a lease may require it.  We know that health insurance is important to protect us from catastrophic health situations.  In addition, health insurance is easier to acquire if one is a corporate employee or eligible for Medicare. (The gap between work and Medicare can be murkier, depending on your health, state of residence, and income.)

Umbrella insurance comes in at a distant fifth, yet it can be the one insurance that protects you above and beyond liability that can easily devastate your net worth.  It is also often undersold by insurance agents, a mystery to be sure.  Yet, umbrella insurance is a must for business owners and affluent households.

What Is Umbrella Insurance?

Umbrella insurance is a type of personal liability insurance that can be indispensable when you find yourself liable for a claim larger than what your homeowner's insurance, business insurance, or auto insurance will cover.  

Umbrella insurance can even cover

• certain liability claims such as libel, slander, and false imprisonment
• rental property liability coverage beyond what your renter's policy covers
• claims larger than what your homeowner's insurance or auto insurance will cover

Some of these situations may sound far-fetched and the probability of them happening is small; however, if they do, they can be catastrophic.  As parents of pre-teens and teenagers, our bold, curious, and well-intentioned offspring can easily find themselves caught up in a situation beyond their control.  Social media takes on a life of its own and nowadays people do not think twice about pressing charges and initiating lawsuits. Umbrella insurance can provide coverage in the event of damages from a lawsuit settlement.

In any event, it is important to explore the coverage available through different insurers to learn what situations each will and will not cover.  Some situations to consider include:

• driving a car internationally
• owning or renting watercraft 
• employ domestic employees or contractors
• participate in volunteer activities
• coach kids’ sports
• host parties

 An umbrella policy is good risk management.

How much do I need?

The calculation for determining need is fairly straightforward.

1. Start with your total net worth.  
2. Deduct the home equity in your home (up to the allowable state exemption.  (In Illinois it is only $15,000).  
3. Deduct values of 401K, IRA, 403B (plans covered by ERISA are not subject to claims).
4. Deduct the liability coverage from your home or auto insurance for one person, whichever is less.  Round to the nearest million.

Example:

Net worth:                       $2,000,000
Home exemption:          $     15,000
IRA, 401K:                        $1,000,000
Auto liability for 
one person:                    $    250,000

Balance:                          $    735,000

In this example the recommended amount of umbrella coverage is $1MM.

If you own rental property, a business, or other assets the calculation may be different.

Where do I buy it?

Generally, it is better to buy your umbrella policy from your home and auto insurer.  This allows them to efficiently apply your coverage from multiple policies due to an incident.  It can also be less expensive to purchase it “bundled” with your other insurance.  Umbrella insurance is not expensive.  One million in coverage can range between $150-$300 annually.

Risk management is an important part of the thought process when it comes to building a secure lifestyle.  While unanticipated events are part of life, protecting one’s life and family as much as possible is good planning.   Please find a helpful property and casualty checklist by clicking this link.



*Mosaic Fi does not sell any insurance products nor do we accept referral fees.