Umbrella Insurance

Let’s start with defining what homeowners insurance does. Simply put, it protects you if, say, a fire burns your house to the ground. That's a start. But you also need to think about protecting your home against something equally dangerous: a lawsuit. If a houseguest slips in the bathtub, you could get sued. A visitor trips on your front steps, a neighbor cleaning your gutters falls off a ladder, a house guest takes a tumble after slipping on your hardwood floors, your dog bites someone, a member of your residence causes accidental damage to the property of others, an idle remark can get you sued for slander, a car accident can land you in court, or a neighbor's kid falls off a swing in your backyard. Insurance agents call swimming pools, jungle gyms, and trampolines "attractive nuisances" because they draw children unable to appreciate their dangers. Automobile accidents can also lead to lawsuits and you can be sued due to personal injury, which includes a wide variety of problems such as emotional distress or sickness or disease. You can be sued for malicious prosecution, humiliation, libel, slander, defamation of character, or invasion of privacy. Although many of the above scenarios seem to have little to do with homeownership, the end result of an unfavorable lawsuit judgment can wipe out your net worth – including the loss of your home. That's why protecting yourself against lawsuits is an essential part of protecting your home. So, what is a prudent homeowner to do? Increasing the liability limits on your homeowners insurance can help, but homeowner liability extends beyond the property line. Umbrella insurance offers the advantage of extending the liability protection on your home and auto policies by adding a layer of protection. It is designed to take over when your homeowners insurance reaches its liability limits and supplements with additional coverage. Before you shop for additional liability coverage or an umbrella, determine how much liability coverage you already have. Most homeowner’s insurance policies are capped in the $100,000 to $300,000 range. If you own a very modest home and have few other assets, then that may be sufficient. However, most homeowners require more. Even $300,000 can disappear quickly in the face of a major lawsuit. The median home price in our area during 2010 was approximately $360K. Add to that the value of your personal possessions like jewelry, cars, boats, vacation homes, rental properties, and savings, and the assets you need to protect probably exceed the limit of your homeowner’s policy. You can even be forced to give up a portion of your future income. It's worth noting that some states, including California, have so-called homestead laws that can protect homes from creditors. There are however many exceptions to the rules and the amounts are very limited. Of note is that many financial advisers prefer umbrella insurance over increasing the liability coverage of a homeowner policy because the umbrella insurance applies to your vehicles as well as your residence. Remember, umbrella insurance is an overarching policy that covers liability issues at home and in the car. This is critical since you could lose all of your assets including your home as a result of a major lawsuit stemming from an auto accident. OK, once you know your present liability limits then you should check with your current home and auto insurers since many insurers offer multi-policy discounts. An umbrella policy, which typically costs about $300 a year for $1 million of coverage, can usually be issued in a couple of hours, unless red flags come up such as a poor insurance score, poor credit, or an extensive history of home and auto claims. The surprising thing about the cost of umbrella insurance is that it can be influenced as much by your driving record as it can be by your record as a homeowner. Ironically, the cost, size, and age of a home have little effect on liability. More relevant are specific features of a home like a swimming pool that are more likely to lead to accidents. All other things being equal a $1M umbrella policy costs the same for the owner of a newly built 10-bedroom mansion as it does for the owner of a 900 sq ft, 1920 built bungalow. That doesn't mean the owners of the mansion and the bungalow need the same amount of liability coverage because the mansion owner probably has more to lose from a lawsuit. Homeowners should think about liability coverage equal to twice net worth and probably no less than $1 million. Doubling net worth accounts for your future income stream too since that can be fair game in a suit. Premiums will start to add up if you seek umbrella coverage above $5 million. Be realistic about your assets and risks and here’s a short list of factors to consider when deciding how much liability coverage to buy: •Net worth. The higher it is, the more coverage you need. •Owning a business. Your potential exposure to lawsuits increases. •Young drivers in the household. Teens are more accident-prone. •Visibility in your community. The better known you are--think CEO or celebrity--the more potential there is for a lawsuit because you're considered a person with "deep pockets." •Attractive nuisances. Kids are more likely to get hurt at homes with pools, trampolines, jungle gyms, and the like. There are some other steps you can take to protect your assets from lawsuits beyond umbrella insurance. Homeowners could look into putting as much of their net worth as possible into qualified retirement plans, since those plans are often off the table in lawsuits. Exploring trusts and limited-liability corporations, or LLCs, is also a good idea. Another strategy is taking out, but not tapping, a large line of credit, and having the lender record the largest amount of potential loan on your property. This has the effect of showing little or no equity on a house which may discourage attorneys looking for a big payday. I trust that I have “whet your whistle” a bit regarding Umbrella insurance.

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