By Peter Mastrantuono
Many Americans are ill-prepared for the one financial storm that can upend years of disciplined savings and investing. While most individuals are adequately protected against the financial impact of damages to a home or auto, fewer are adequately protected against the large personal liability exposure that may arise from damages or injuries involving their property.
The financial costs of an adverse event is typically covered by standard home and auto insurance policies, but in some situations, the liability damages may exceed the coverage limits of the policy, exposing an individual’s personal assets to a legal judgment.
Protecting against this potentially highly damaging scenario can be readily addressed, and quite inexpensively, through an umbrella policy.
An umbrella policy, which is also referred to as excess liability or personal liability coverage, supplements other liability coverages that individuals may already have under their auto, home or renters insurance. The umbrella policy coverage is designed to kick in when damages exceed the coverage of the standard policies an individual already owns.
The risk of an outsize financial judgment may be remote, but its impact can be ruinous. These risks tend to be heightened if an individual owns a business, is a pet owner, coaches youth sports, has investment property or owns a swimming pool.
Injuries or death can involve huge costs of lost income to the injured party’s family or years of expensive medical care and rehabilitation, which can quickly exhaust the liability limits of standard insurance policies.
Once those limits are exceeded, a lawsuit could target an individual’s personal assets, including home, car, investments and cash savings. If personal assets are insufficient to meet a legal judgment, an individual’s future income may also be attached.
A typical umbrella policy covers the cost of bodily injury (including medical bills) and liability claims and damage to another party’s property (including a car accident in which the policy owner is at fault and accidental damage to school property caused by the child of a policy owner). An individual can also elect to add protection against the financial costs of slander, libel and mental anguish.
An umbrella policy will usually also cover the legal defense costs arising from a lawsuit. For many individuals, there is a comfort knowing that a big insurance company, which hopes to limit its losses, is on their side going into court.
Since an umbrella policy is considered a secondary form of insurance coverage, an individual is required to be first covered by a primary form of insurance, e.g., a homeowners policy.
An umbrella policy is not the only means by which individuals can protect themselves against personal liability, but it remains a cornerstone to any sound risk mitigation strategy.
An experienced financial advisor can help individuals not only determine the right dollar coverage of an umbrella policy for their specific set of circumstances, but also work with them to develop a comprehensive plan to reduce the financial exposure of personal liability risks.
Peter Mastrantuono is a contributing writer to http://www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.
