Protecting your net worth with umbrella insurance

Have you ever stopped to consider what would happen to your finances if you were sued for accidently injuring someone or causing damage to their property? While you may have some personal liability coverage in your home or car insurance policies, it may not provide enough protection to safeguard your financial well-being.

In today's world, no matter what your financial circumstances are, it's important to know how to protect your finances. You don't need to be a millionaire to potentially get sued like one.

Umbrella insurance is one of the best ways to help reduce risk and have serious financial protection from certain types of legal claims. It can be thought of as personal lawsuit insurance if you're found liable for covered injuries or damages to someone else or their property.

If you're sued for accidental injury or property damages and the judgment exceeds the coverage limits of your auto or home policies, umbrella insurance could kick in to help cover what your other policies don't. The goal is to help protect you from surrendering your assets or paying for excess damages out of your own pocket.

Laws in many states have protections in place to help you avoid being forced to sell your home, vehicles, or personal property or turn over your retirement accounts, but those laws vary state to state. If you're sued and have assets that aren't protected, it can affect your entire financial picture. You should consult a legal professional for questions about how these laws apply to your situation. Also, consider your individual risk tolerance and ability to pay out of pocket when deciding how much excess coverage you need.

How can insurance protect you from financial loss?

When you buy an insurance policy, you're paying for financial protection. If you're responsible for covered accidental injuries or property damage to others, paying damages out of your own pocket could break the bank.

For example, let's say you're having a birthday party for your six-year-old at your house, and you rent a bouncy house to make the party more exciting. If one of the guests ends up accidentally injured, you could be facing litigation.

In a scenario like this, you could be sued for medical expenses or damages that could run into the thousands. You could be facing financial strain if you don't have enough personal liability coverage on your homeowners insurance policy.

An umbrella policy is designed to provide liability insurance above and beyond the limits of your other policies to help protect you if you're held liable for a covered event.

Other reasons that umbrella insurance is important

Umbrella insurance can also provide some financial protection from these types of claims and lawsuits that the liability insurance coverage in your home and car policies may not.

• Libel, defamation or slander
• Invasion of privacy
• Malicious prosecution
• Wrongful eviction or entry
• False arrest, imprisonment or detention

Personal liability coverage versus umbrella insurance

Personal liability insurance is a standard part of most car and home insurance policies. It helps pay for other people's bodily injuries or damage to their property if you or a family member are responsible.

But the personal liability insurance you have with your car or home insurance only covers you up to those policy limits. And depending on your situation and net worth, you may want extra protection so you're not on the hook to pay out of pocket for excess damages. An umbrella policy provides you with excess liability coverage for covered losses beyond the liability coverage limits you have on your auto or homeowners policies.

Let's look at a couple examples:

Note: The coverage descriptions below are brief and may not reflect the limits or coverage terms and conditions in your various policies. Actual coverage determinations depend on the facts and circumstances of the loss as well as the terms and conditions of your policy. Read your policy for more information.

You cause a car accident. You run a red light and crash into another car. You injure the other driver and his passengers, and damage his car. With multiple injuries and damage, costs can add up quickly.

In this scenario, medical costs or vehicle damage could exceed the coverage limits of your auto insurance policy. You could also be sued for pain and suffering. If you had umbrella insurance, it would kick in to help pay these costs above your auto policy's limits, up to the umbrella policy's limit.

Your dog bites the mailman. Your child flings open the front door just as the mailman gets to your porch. Your dog mistakes the mailman for an intruder and goes into protective mode. The bite requires extensive stitches and your mailman's out of commission for weeks.

First, the personal liability coverage on your homeowners insurance would pay up to the policy limits. If the cost of medical care, disfigurement and lost wages exceeds the limits of your home policy, umbrella insurance would cover the rest up to its policy limit.

Benefits of umbrella insurance

It helps protect your assets.

If you're sued, you could be forced to sell or turn over your hard-earned assets to satisfy a judgment against you. How bad could that get? Without the asset protection that umbrella insurance can provide, you could face significant financial setbacks.

Assets are things like these with financial value.

• Homes
• Vehicles
• Checking and savings accounts
• Retirement savings
• Jewelry, antiques and other valuables
• Investment properties
• Investment accounts
• Potential future income

It helps protect your net worth.

Your net worth is the value of all your assets (everything you own, including cash, investments and retirement savings), minus your total liabilities (outstanding debts you owe).

So if the total of everything you own is worth $2 million, you could consider umbrella coverage up to $2 million.

Laws in many states may protect some of your assets from collection if someone has a judgment against you. They could include your home, personal vehicles, certain personal property, and certain types of retirement savings.

You should consult a legal professional for questions about how these laws apply to your situation. Consider your individual risk tolerance and ability to pay out of pocket when deciding how much excess coverage you need.

Tips for personal liability insurance

It's important to carry enough liability insurance to protect your finances in light of your individual needs and circumstances.

When deciding on coverage, here are some questions to consider:

Are there things in your life that increase risk of a lawsuit? Are there inexperienced drivers in your household? Do you have a pool or trampoline? Do you own rental properties? Anything that increases the risk that you or your family could be sued for accidental injury or property damage is worth noting.

How much risk are you comfortable with?
What's your risk tolerance? How comfortable are you shouldering the risk on your own versus getting insurance in place? Are you in a position to set aside funds so you could pay out of pocket, if necessary?

What are the liability limits of your home and car insurance? Personal liability limits can vary from insurance company to company. Most will offer coverage within a range from $100,000 to $500,000. Is that enough to protect your assets if you get caught up in a big lawsuit? If not, consider adding umbrella insurance.

What about future income loss? A big lawsuit could be financially devasting for years. Even if you're not at the top of your pay grade yet, it's important to be sure you have some protection for your potential future income.

When did you last review your policies? Your coverage needs can change over time. It's important to review your policies every year to be sure you're adequately protected.

While umbrella insurance can't prevent you from being sued, it can give you peace of mind knowing that you have some additional protection for your finances.