There is nothing that can derail your financial success or path to independence as fast as being held liable for some kind of catastrophic loss without the appropriate level of insurance coverage. Automobile and homeowners insurance (or renter’s insurance) cover only up to a certain amount of your liability if you or your property is involved in an accident. If your wealth exceeds those limits, you could be at risk.
That’s the case for umbrella insurance. It picks up where automobile and property insurance leave off. Shopping for umbrella insurance, until recently, was yet another task that I put off. A confluence of events reminded me to get this done: my initial meeting with an estate planner had me thinking about protecting my assets, and I received the renewal documentation for my renter’s insurance with Liberty Mutual, the same company that holds my auto insurance.
I called Liberty Mutual to review my current coverage and to ask for a quote for their umbrella insurance coverage. Nothing is as simple as one telephone call, so while I was able to adjust my renter’s insurance to protect more of my belongings, to find more information about the umbrella insurance, I was directed to a local agent.
We discussed my needs based on the total of my assets, and I was looking for a $5 million policy. That’s the upper limit of what this company offers. In order to qualify for any umbrella insurance, however, auto insurance and home or renter’s insurance must include coverage at specific levels of liability. My renter’s insurance already qualified, with $300,000 in personal liability coverage, but I needed to make a chance to my car insurance. The laws in other states may differ, but at least in New Jersey, to qualify for an umbrella insurance policy, according to the agent, one needs at least liability coverage of 250/500, or $250,000 per person and $500,000 per accident.
The agent needed some time to pull my information together for a quote. She called back, offering me the $5 million coverage for over $750 a year. The cost seemed high to me, so I didn’t make any commitments. I mentioned I would call her back. I turned to the internet for research, and saw that this type of cost was not uncommon for a high level of coverage. Basic coverage is $1 million, and that’s what most customers have. Thus, this lower level of coverage is relatively inexpensive. Once you begin looking for coverage at $2 million and above, the cost of the premiums tends to increase substantially, because the pool of customers at those levels is smaller.
I made a failed attempt to get a competing quote. I called GEICO directly to try to compare prices directly, but GEICO could not offer me coverage unless I had been invited to apply for their auto insurance. Otherwise, GEICO does not do business in New Jersey.
To move forward, I called the Liberty Mutual agent back and asked some more questions about coverage. Just about every question required her to check with her manager, and ultimately she came back and said that coverage at the $5 million level would require state approval. She suggested going with $4 million in umbrella insurance coverage while increasing my renter’s insurance liability to $1 million. Either way, my assets should be well covered — assuming any potential problem I face in the future is covered by insurance at all. This shift saves some money compared with leaving my renter’s insurance as is and going with the $5 million umbrella insurance coverage.
In total, the additional annual cost is about $650. That’s a small price to pay for additional asset protection. Of course, like any other kind of insurance, the mathematical perspective is only part of the story. If you never need to use your insurance, you’ve spent a lot of money over the course of your lifetime for a service the company never provides. And insurance companies do often make it difficult to qualify for legitimate claims.
But the alternative — being held liable without the proper insurance coverage — will quickly destroy any wealth you’ve been able to build, require you to liquidate investments or real estate, and possibly cut into your future earnings. I’m knocking on wood that I’ll never need to go through the process of filing a claim against this policy.
After I completed this quest, I sent my business insurance agent a quick email. Umbrella insurance and home insurance generally don’t cover anything that a self-employed individual or a business owner might be concerned about from a legal perspective, and I want to make sure my business liability insurance fills in the gaps left by my other policies.
Do you have an umbrella insurance policy?
Published or updated February 18, 2013.