Thoughts, ideas, suggestions and education from financial adviser Jim Ludwick, Founder of MainStreet Financial Planning, Inc. of Odenton, MD; Washington, DC; New York City, and Santa Barbara, CA

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Sunday, August 11, 2013

Umbrella Liability Policy: NOT

Umbrella Liability Policy: NOT
Why doesn’t anyone ever tell you NOT to buy an umbrella liability policy? Hold on for just a minute while I get prepared to answer this question. But first this discussion:

Now we’re in the business of helping people make good financial decisions.  That includes looking at what kind of protection you need for what you’ve accumulated over the years or are about to accumulate.
To those ends, an umbrella liability policy adds another layer of insurance protection to your home and auto liability coverage.  It usually comes in increments of one million dollars and it doesn’t cost too much, maybe $200 or so dollars a year for the first million, less for additional millions.

Now if you’re like most middle class folks you might have $100,000 equity in a home, $100,000 in retirement accounts and $25,000 in savings.

If your auto and home liability coverage is $300,000 or more, then why would you need this additional coverage? In many cases you wouldn’t need this protection under the condition I just outlined.  First of all, most retirement accounts offer creditor protection (think of OJ Simpson avoiding the Goldman family lawsuit awarding them $30 million, but not collecting anything since OJ’s money was in the NFL pension plan). So now you only need protection for your $125,000 of equity and savings, right?
Well maybe. That’s where the rub comes in. In doing my research for this missive, I saw the scare tactic of gigantic lawsuits that award the plaintiff millions of dollars, leaving you or some other defendant destitute. If you don’t have enough assets they can get to, they might GARNISH your wages. Oh heavens! But it’s only 25% (federal), or even less in some states, that they can take away your from you wage income through further court action.

So, what does an umbrella liability policy cover?

Bodily Injury Liability – covers the cost of damages to another person's body. Examples include the cost of medical bills and/or liability claims as a result of:
  • injuries to other parties due to a serious auto accident where you are at fault,
  • harm caused to others as a result of your dog (yeah, you probably should have taken him to obedience school),
  • injuries sustained by a guest in your home due to a fall, or
  • injuries sustained by a neighbor's child who falls while playing in your yard.
Property Damage Liability – covers the cost of damage or loss to another person's tangible property. Examples include the cost associated with:
  • damage to vehicles and other property as a result of an auto accident where you are at fault,
  • damage claims incurred when your pet rips a friend's priceless oriental rug to shreds, or
  • accidental damage to school property caused by your child (hey, you can't disown them).
Owners of Rental Units – helps protect against liability that you may face as a landlord. Examples include the cost of liability claims as a result of:
  • someone tripping over a crack in the sidewalk of your rental property and suing you for damages, or
  • your tenant's dog biting someone and you being held responsible for the injuries.
Coverage is also provided should you be sued for:
  • slander – injurious spoken statement,
  • libel – injurious written statement,
  • false arrest, detention, or imprisonment,
  • malicious prosecution,
  • shock/mental anguish, and
  • other personal liability situations.
Source: GEICO

Ok. So here’s my answer. Now that you know many of the facts, you can make an informed decision about whether you need an umbrella liability policy. In many cases you are better protected by having one.  Remember, I didn’t tell you NOT to get one. That will make lawyer happy, but not that happy.