The least understood but most important type of insurance
I grew up in the Pacific Northwest where it rains. Not a little, but a lot. That’s why I’m such a big fan of something called umbrella liability insurance. If you’re like me, you go through a lot of umbrellas. You lose them, or in a heavy wind they do that flipping thing and then get ruined. Well, fret no longer. You can get umbrella insurance! Just like auto insurance covers your car and homeowner’s covers your house, umbrella insurance covers your umbrella.
What? All right, I’m just kidding.
Basically, take everything I said about umbrella insurance and forget it.
Umbrella liability insurance does not actually insure your umbrella. It does something much cooler and, some would argue, a lot more important. And if you consider not ruining your finances and being dead broke for the rest of your life more important than having a good working umbrella, then sure, I guess it’s more important.
Here’s how umbrella liability insurance works.
The key word is liability. What is liability? It’s basically when something goes bad and you’re responsible for making it better again. Here’s an example: you crash your car into another car. Okay, so your auto insurance will pay to fix up your car and the car you hit. That makes sense. But what if the person you hit got really hurt? They might sue you. You hit them with your car, so your auto insurance should cover this. And guess what? It does. Yeah! But, not so fast.
What’s the minimum liability you need on an auto policy in California?
- $15,000 – this is the correct answer
Well, what happens if you get sued for $1 million and your policy goes up to $250,000? No problem. You tell the person suing you that your insurance will only pay $250,000, and then they reduce the law- suit against you down to $250,000. That’s sweet of them. And that’s total fantasyland. Ain’t gonna happen. Here’s what would happen. Your auto insurance company pays them $250,000, and then you become responsible for paying them the remaining $750,000. Yup. You might have to sell your stocks and bonds, maybe your house, and if that’s not enough, they might take part of your paycheck each month until you’ve paid off the whole amount. That, my friends, is a nightmare. You work decades earning, saving, and making smart decisions, and then, because you decide you need a gallon of milk from the store, you lose it all in the blink of an eye.
Enter umbrella insurance… sometimes called personal liability insurance.
It’s super cheap, about $250 a year for $1 million worth of coverage.
I normally don’t like telling people what to do – okay, who am I kidding? I love telling people what to do, but I usually am better at resisting the temptation. I can’t resist here, though, because the lesson is too important. You absolutely must have an umbrella liability policy. Must, must, must. This is one of those no brainers.
Call the insurance company where you have your auto or homeowner’s insurance and tell them you want to add this. Okay, but how much? The minimum is $1 million. I know that sounds like a lot, but it’s only $250 a year and if someone sues you, there is a good chance it will be for a lot. If you have significant assets, get more. I have clients with $20 million umbrella liability policies.
Why are you still reading this? Stop it! Pick up the phone and get this cheap protection now!
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.