Should You Buy an Umbrella Insurance Policy?

Discover the importance of umbrella insurance for high-net-worth individuals to protect your substantial assets and investments.

Written by: Kevin M. Curley, II, CFP®

High-net-worth individuals often have complex financial portfolios that include substantial assets, investments, and businesses. While they enjoy financial success, they are also more vulnerable to risks and lawsuits due to this substantial wealth. To protect their wealth and assets, these individuals should consider purchasing an umbrella insurance plan as part of their comprehensive risk management planning.

What is Umbrella Insurance?

An umbrella insurance plan offers an additional layer of liability coverage that goes beyond the limits of your existing auto, home, or other primary insurance policies. Essentially, it “covers” you like an umbrella, shielding your assets from unexpected financial storms.

While it is common for auto or home liability to provide hundreds of thousands of dollars of coverage, that money can be quickly spent, especially if significant injuries occur or if a plaintiff is awarded punitive damages.

Reasons for High-net-worth Individuals to Consider an Umbrella Plan

There are several compelling reasons why someone should consider purchasing an umbrella plan. These include:

Increased Liability Coverage. Standard insurance policies, such as auto or homeowners insurance, have coverage limits that may not be sufficient for high-net-worth individuals. An umbrella policy can provide coverage in excess of these primary policies, offering an additional layer of protection, often in the range of $1 million or more. This extended coverage is invaluable in protecting personal and business assets.

Asset Protection. High-net-worth individuals often possess assets such as multiple properties, investments, and businesses. In the event of a lawsuit or a liability claim, these assets could be exposed to potential loss. An umbrella insurance plan acts as a financial shield, helping to protect your assets and maintain your wealth in the face of legal threats.

Defense Costs. Legal battles can be expensive, and legal defense costs can quickly deplete your financial resources. An umbrella insurance plan typically covers legal expenses and can help you navigate the complexities of lawsuits, ensuring that your interests are safeguarded without incurring exorbitant costs.

Personal Liability Risks. High-net-worth individuals often lead more public lives, engaging in activities that could lead to personal liability claims. These can include hosting social events, participating in philanthropic endeavors, or serving on boards of directors. An umbrella policy offers protection against personal liability claims arising from such activities.

Business Ventures. High-net-worth individuals may have a stake in multiple business ventures or investments. Umbrella insurance can extend its coverage to these business interests, safeguarding your wealth from potential business-related lawsuits or liability claims.

How Much Umbrella Insurance Do You Need?

As a starting point, you should consider your expected earnings and current assets. Some assets, such as your 401(k) at work and IRAs, have built-in protection from creditors. Certain types of life insurance and annuities can provide protection from creditors as well. There are other assets, however, that fall within a grey area. Depending on the legal structure of your state laws, your stock options, stock awards, or partial ownership of your company might not be protected.

It is important to work with an attorney to review asset titling and ownership and understand the extent of liability you may find in your home state. Each state has varying laws regarding potential liability. For example, some states don’t let you garnish wages, but others do. Texas, for example, has the Homestead Act, which protects a primary residence. Meanwhile, Alabama allows unlimited punitive damages, and due to this, residents of Alabama have seen some of the largest awards. If you live in places considered judicially problematic, like Long Island, New York; Cook County, Illinois; and parts of California, you might consider taking out higher limits.

Consult a property and casualty insurance agent to help set your underlying limits. In addition, you may have to buy the umbrella coverage from the same company that issues the underlying policies. An independent agent can shop the market and provide several quotes to meet your needs.

When Should I Consider Buying an Umbrella Policy?

Many people do not realize that their insurance may not cover issues like the family dog biting a neighbor, or death or disablement in an auto accident. Depending on the carrier, an umbrella policy could also provide coverage for damages you may not think about, such as libel or defamation.

Groups who should consider protecting themselves with an umbrella policy:

• People who have sizeable assets
• Those who own a pool, trampoline, or bounce house
• Those who own dogs associated with risk exposure, such as German shepherds, Dobermans, huskies, rottweilers, and pit bulls
• Landlords
• People who engage in risky activities like hunting and mountain climbing
• People who volunteer in the community (e.g., youth sports coaches)
• Executives and business owners, high-income earners, and medical professionals
• People who have dependent children

In addition, for-profit and non-profit board members should consider Errors and Omissions (O&E) coverage and Directors and Officers (D&O) insurance. These policies offer additional coverage specific to the activities a board member might engage in.

An umbrella policy can be an important strategy in your risk management toolbox if you’re a high-net-worth individual or business owner. It can offer you an extra layer of security by providing money to pay a settlement, fund legal fees, and protect your future income.

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Kevin M. Curley, II is a financial advisor located at Global Wealth Advisors 100 Crescent Court, 7^th Floor, Dallas, TX 75201. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network^®, Member FINRA  / SIPC,  a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (214) 613-6580 or at info@gwadvisors.net.

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