Insurance by definition protects you against unforseen acts of man or nature—fire, floods, death and taxes. Yes, taxes—-people who have large estates buy life insurance to pay for estate tax upon their death so their children and spouse do not have to make rash decisions to sell the business or assets to pay for estate duty.
But it is very important to consider another form of insurance not commonly in practice–Personal Umbrella Insurance Policy.
Personal umbrella insurance protects you against excess liability claims. Here is what it means. Your car, home and rental property all have specific liability insured—damage to property, theft, uninsured motorist etc. But one liability that is paramount in our litigious society is excess liability. That is where umbrella insurance protects you.
Let us say you rent your property to a tenant. There is a gas leak–thankfully it is detected in time and there is no blowup, but your tenant breathes fumes. He will definitely consider suing you beyond just the health cost and property damage if any. If you are found to be liable, and damages exceed your tenant property insurance, he can then come after your other assets, even in a civil case.
A friend had a fender bender—in fact, his car just nudged the other car in traffic. Both drivers got out, looked at their cars, agreed there was no need to inform police because there were no dents or marks on either car. My friend went home, thanking his stars NOT SO FAST! Two days later, he got a call from the other driver that she suffered neck pain, whiplash and was seeking treatment from expensive specialists. Again, lucky for my friend, his policy maximum limit was not breached for medical insurance. But what if it had? What if the neuro-surgeon had prescribed expensive diagnostics and treatment? My friend would be fighting the lawsuit and a large amount of damage claim which could only be satisfied using his personal savings, since the auto policy would have been exhausted.
Unfortunately we live in a society where lawyers, some of them not all, make a living chasing ambulance claims. This includes trauma, mental injury, incident impact and other claims that leave no physical evidence of damage, yet can cost you hundreds of thousands of dollars.
A good personal umbrella policy is one of the cheapest forms of insurance to protect against catastrophic damage claims and awards. They start covering you when your specific damage policies give up.
Some experts advise against personal umbrella policy. Their logic is, if the other party knows you have a large umbrella coverage, they are that much more incented to go after you even on frivolous charges. I disagree. Most attorneys who practice ambulance chasing act first, i.e. sue, then worry about how much they can collect. You do not want to risk your personal savings and assets being subject to such greed.
So how much insurance should you have. I suggest you add up the maximum coverages from all your policies. Then add up your gross assets. Multiply the total assets by 150%, deduct maximum coverage and if the result is a positive, that is the amount you should cover. Why 150%? Because over time your assets will grow, but your maximum coverages may not. You may also drop some policies.
Remember, when buying any insurance, cost while it is a factor should not be an overriding one. Instead look for reputable, A+ rated insurance companies and make sure your policy covers negligence.