Despite these high profile cases, 40 percent of wealthy households have less than $5 million in umbrella liability coverage, including 21 percent who have none at all. Umbrella coverage is a critical component of an overall personal insurance program because the liability coverage in home and auto policies rarely exceeds $500,000. When those limits of coverage are insufficient, umbrella coverage kicks in to provide additional protection.
Without the additional protection, families can be forced to sacrifice their homes, their savings and investments, and their future income stream to pay damages. These dire consequences explain why agents ranked umbrella liability as the most serious problem of underinsurance. Fully 40 percent of agents gave it the top spot, more than for any other type of coverage.
How much umbrella liability coverage should someone purchase? The most prudent choice is to match the combination of your net worth and future income stream. Carriers that specialize in serving high net worth families typically offer up to $100 million in coverage. Their policies also pay for legal defense costs without using up the liability limit and cover the cost of having a public relations firm protect the client’s reputation.
Surprisingly, the cost per million dollars in coverage can amount to only a few hundred dollars. Thus, the savings in taking a higher deductible and bearing more responsibility at the low end of risk can more than pay for protection at the high end of risk — the kind of risk that can devastate a family’s financial well-being and lifestyle.
Besides encouraging clients to purchase the right amount of umbrella coverage, agents cited two additional mistakes to avoid:
- The umbrella liability coverage should start when the home and auto liability coverage limits end. For instance, if the home and auto policies provide up to $300,000 in liability coverage, the umbrella policy should start at $300,000. If it starts at a higher amount, say $500,000, the client could become responsible for paying the $200,000 gap.
- Recreational vehicles and company cars should be listed on the umbrella policy. In the case of company cars, the company-purchased auto insurance may prove inadequate, especially when the car is being driven for pleasure.
86 Percent Said Likely Underinsured
One in seven drivers has no insurance, according to the latest nationwide statistic from the Insurance Research Council.4 In some states, the ratio can be one in four. Due to the difficult economy, many more may have only the state-required minimum level of liability insurance, which can be as low as $20,000 or even $10,000.
If one of these uninsured or underinsured drivers causes an accident that results in serious injury, the injured person would stand little chance of recovering expenses for medical care that could run into the millions of dollars. The other driver would probably have insufficient assets to pursue in a lawsuit.
No-fault auto insurance laws could help in the few states that have them. Health insurance could also help, but lifetime payout limits and co-pay percentages could still impose a significant financial burden. Also, health insurance does not compensate for lost income and pain and suffering.