There’s a gap most people have in their insurance plans, and it eventually could cost them a bundle.
In general, people have the right amount of insurance for damages to their property, whether it is their homes, other real estate, vehicles, boats, or other items.
But people often underestimate their potential liabilities and carry far too little liability coverage. That puts their net worth and financial security at risk.
Liability insurance covers money we owe to someone who is injured by our actions, our property, or while on our property.
The most obvious liability is when we’re at fault in an auto accident. We’re likely to have to pay for all damages to others and their property. You’re also likely to be liable if someone in your family causes an accident while driving your vehicle.
Or someone could be injured while on your property, such as by tripping on a loose rug, a step, or an uneven part of your sidewalk. If you have a pet, you could be liable for any bites or other damage it inflicts on others.
In addition to medical expenses, you could be liable for lost wages for an indefinite time. There’s also the vague “pain and suffering” and other damages that many states allow.
Stray words and actions also can trigger liability for libel, slander, harassment, or other claims. It’s not unusual for a person to write something in an email or text they believe is private only to have others find out about it and say they’ve been damaged by the statement. Some businesses sue individuals who post bad online reviews.
Volunteer activities also can result in unexpected damage claims. Employing part-time workers around your house or serving alcohol to guests can result in liability claims.
This is only a short sample of the activities that could result in unexpected personal liability.
Frankly, if you have a decent amount of money, some people view you as a potential target.
Liability coverage is standard in vehicle and homeowner’s insurance policies. But there’s a dollar limit to the liability coverage. That limit is adequate for the average or median case, but that leaves a lot of instances when a person’s liability exceeds the standard liability limit. Those policies also don’t cover all the potential sources of liability.
The solution for most people is to add umbrella liability insurance, also known as excess liability insurance. The coverage can be purchased separately, but you’ll save a few dollars by bundling it with your existing home or auto insurance.
Umbrella coverage kicks in after claims against you exceed the liability limits of any existing vehicle, homeowner’s, or other insurance that covers the incident. The umbrella policy also will pay if no other insurance is the primary coverage for a covered claim.
Umbrella liability insurance is affordable. For most people in most states, $1 million of umbrella coverage will cost $400 or less. Adding umbrella insurance usually is less expensive than increasing the liability limits of vehicle and homeowner’s policies, plus the umbrella policy has broader coverage.
One approach is to buy umbrella coverage equal to the value of your assets. If you have $2 million of assets and the liability coverage in your other policies is limited to $500,000, then take out $1.5 million of umbrella coverage.
But that doesn’t protect your assets if a liability claim against you exceeds $2 million.
Another approach is to survey the assets you own and the activities you’re involved in. Try to estimate a potential liability amount that might arise against you. Then, buy umbrella coverage for that amount.
When selecting the amount of coverage, keep in mind that the value of your assets and potential liabilities are likely to increase over time.
Read the umbrella policy carefully and understand its limits. Though generally called umbrella liability insurance, the policies don’t cover everything.
You generally won’t be protected from the consequences of actions the insurer determines are intentional, criminal, or a violation of law.
A policy might exclude liabilities that arise from the use of certain assets (especially boats and private aircraft) or from certain activities, though you might be able to pay extra to have those covered.
Most policies also won’t cover damages caused by certain breeds of dogs.
The umbrella policy probably will make reference to your existing vehicle and homeowner’s insurance by stating it won’t cover anything excluded under those policies.
Be sure to check the extent to which you’re covered for actions of other members of your household.
You also should coordinate the benefits of the umbrella policy with vehicle and homeowner’s insurance. For example, your other insurance might cover liabilities up to $300,000, but the umbrella policy might pay only liabilities that exceed $500,000. You’re potentially on the hook for $200,000 unless you pay more to change one of the policies to fill the coverage gap.
Be sure the policy has a comprehensive list of the property you own that might trigger a liability, including all real estate and vehicles, and that it covers both owned and rented assets.
Some policies will exclude volunteer activities, especially serving on a board. Others exclude any claims from employing workers in or around your home. Know these limits and decide if you want to buy coverage for those risks.
Keep in mind that an umbrella policy covers only liabilities to others. If damage to your property exceeds the limit on your other policies or the policies say the damage isn’t covered, the umbrella policy isn’t going to pay for damage to your property.
Umbrella insurance also isn’t going to protect your assets from claims by most creditors other than those with liability claims.
Some people believe they’re protected from liability claims because most of their assets are in either trusts or retirement plans such as IRAs and 401(k)s. But many states have limits on the protection afforded to those assets. Check with an asset protection attorney before concluding that your assets are safe from claims.
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