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Why you need umbrella coverage

By Randy Neumann

When writing a financial plan for a client, we go through a discovery process.  During the initial consultation, we ask questions as to what the clients need and expect from us, and we show them the types of services we provide.
If they decide to have a financial plan written, we give them a checklist of documents they need to bring to the next, fact-finding meeting.  On the checklist is a list of insurance coverage.  In the casualty section, we ask for the declaration pages for automobile, homeowner’s and umbrella policies.  From most people, we get a nod as to automobile and homeowner’s insurance, but the typical response regarding umbrella coverage is, “What’s that?”
That’s too bad because this is an area of large financial exposure.  By statute, the most liability coverage you can get in New Jersey on your house and/or your car is $500,000.  If you live, for example, in Bergen County, your house is probably worth $500,000 – plus you probably have other assets such as checking and savings accounts.  You probably own some stocks, bonds, and mutual funds in your investment account in addition to personal retirement accounts, e. g., traditional and Roth IRAs, as well as company-sponsored retirement plans: 401(k), 403(b), SEPs, profit-sharing plans, etc.
Let’s say that after you add up all your assets, you have a net worth of $1 million plus.  We live in a litigious society.  What would happen if you were in an automobile accident and you were found to be the cause of it?  If someone sued you for $5 million, they wouldn’t get $5 million because you have only $1 million plus in assets.  Your insurance company would pay out $500,000, and you would have to pay the difference between the $500,000 and the total of your assets.  In this case, that amount would be $500,000 plus.  Not very appetizing, to say the least.
Recently, I met with a client at her home (yes, I do make house calls, she’s 84 years old) to review her financial situation.  When asked whether or not she has umbrella liability coverage, the answer was, “What’s that?”  I explained that an umbrella policy covers liabilities in excess of $500,000.  It is usually attached to the auto or homeowner’s coverage and costs about $200 per million.  Her net worth was about $1 million, so she could cover her assets for $200 annually.
She asked, “How do I get the coverage I need?”  I told her I’d have an insurance agent contact her.  I have a friend who owns a large property and casualty shop in Bergen County, so I asked him to make a house call as well.  He did and after reviewing her policies, he told her to contact her agent (from a big-name insurance company) and ask him about purchasing an umbrella policy.  Her agent quoted a price of $200.  My buddy told her to buy it, and she did.
Although there was a happy ending in that a lovely lady was well taken care of, there are some morals to the story as well.
The first is any asset that you have can cause a liability.  One of the best print ads I ever saw was a picture of a desk that had on it a model boat, a vacation home and an automobile.  Each of the items had a fuse attached.  The ad was a reminder that in our litigious society, any asset you own carries liability and that you should have an umbrella insurance policy to cover these liabilities.
The second is in most cases your property and casualty coverage is not reviewed annually; instead, you are only forwarded a premium notice.  I know this because in reviewing client insurance coverage, I often find, besides a lack of umbrella coverage, a lack of sufficient general coverage on the house and on the car.
The third is that you never know where the liability will come from.  I had a client whose teenage son got into a fistfight and broke the other guy’s jaw.  The other guy sued and the case was headed to trial.  Fortunately, because the client had an umbrella policy, the insurance company paid the legal fees and $125,000 to the plaintiff to settle the case.  Had the case gone to trial, the client would have had to pay lawyers and trial fees – probably more than $125,000—to settle the case.  It could have cost around $250,000.
Compared to that, $200 a year is pretty cheap!

You should consult with your financial advisor prior to making any changes in your current coverage.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.  Randy Neumann, CFP® is a registered representative with and securities offered through LPL Financial.  Member FINRA/SIPC.  He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.

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