Why Your Clients Should Consider Umbrella Insurance

What You Need to Know

Clients need life insurance and income planning.
They also need protection liability.
The typical base policy coverage limits may be far too low.

As financial advisors, we’re used to helping clients with many kinds of insurance, including life, disability, long-term care and even health insurance with tools like health savings accounts.

But our clients also have property and casualty insurance policies, such as auto, homeowners, renters, condo and more.

While you may not work directly with those policies, they remain important parts of any client’s overall financial plan — not only to protect against property damage, but also personal liability.

When it comes to those insurance policies, many policyowners may believe they have “full” coverage when there really is no such thing.

A quick review of their policies will reveal coverage limits. For instance, a client may have comprehensive and collision coverage on their auto insurance, but low liability protections.

These clients fail to recognize they are essentially self-insuring about their policy’s stated liability limits.

Many clients reject the idea of increased liability protections because they believe their odds of involvement in a costly lawsuit is low.

While this may be true, this is a conflation of odds and risk — and the risk to a client’s finances can be devastating if a lawsuit award exceeds the liability limits of their insurance policies.

As financial advisors, we help our clients with risk management, and all advisors should recommend umbrella insurance to help clients mitigate this particular risk.

What is umbrella insurance?

The idea behind umbrella insurance is simple: an additional liability policy (usually in one million-dollar increments) on top of homeowners, renters, car or other vehicular insurance.

Umbrella policies kick in once the liability coverage of the underlying policy is exhausted because of a lawsuit, protecting clients from having to pay hundreds of thousands out-of-pocket because of an accident.

Insurers typically require policyowners to bundle umbrella insurance with auto or home policies.

Also, there are usually minimum liability coverage amounts for the underlying policy — a typical minimum might be $250,000 for an auto policy or $300,000 for a home, renters or condo policy.

If needed, umbrella policies can cover legal settlements, court-ordered damages or attorney’s and court fees.

Without this protection, clients are leaving their own assets on the line without realizing the risk they have assumed.

We live in a lawsuit-happy country where people will often sue if they think they have a case.

Not all states have caps on civil lawsuit damages either, so clients can’t always rely on state law for protection against exorbitant jury awards.

Notably, umbrella insurance does not cover everything.

It will not cover damages to a client’s property, nor will it cover harm to persons or property a client inflicts on purpose.

Business activities and liability assumed under contract are also typically excluded.