Your Personal Insurance Program

If you are an automobile owner, you are required by law to have auto insurance.  If you own a home, your mortgage holder likely requires that you have home insurance.  If you are out of your parent’s home and on your own, you probably have, want to have, or shortly will be asked to have health insurance.  Virtually everywhere you turn, institutions that have an interest in your risk of financial harm are there to make certain their financial interests are not compromised.  It may be refreshing to know that there is a type of insurance that serves your interests without reference to the government, the state or the bank.  It is called a personal umbrella policy and it is designed to increase your overall liability protection beyond the basic coverage provided under your homeowners or auto insurance policies. Personal umbrella policies are relatively low cost options for protecting you and your family against a catastrophic lawsuit or judgment.

Why would you think about investing in a personal umbrella policy? Well, let’s look at some numbers.  Your Washington State auto insurance policy must have minimum liability limits for any one accident of $25,000 of bodily injury or death of 1 person, $50,000 of bodily injury or death of any 2 people and $10,000 of injury to or destruction of property. 

If you are an average person living here on the Olympic Peninsula, you will be about 50 years old and your annual household income would average around $47,000 a year (US census data).  A simple formula for determining net worth suggests that your net assets should equal one-tenth of your annual pretax household income multiplied by your age.  Your net worth in this scenario would be about $235,000 – likely more if you are a homeowner.  

Now, let’s assume you are saving money by maintaining the minimum auto insurance policy and during the course of an afternoon drive to Costco in Sequim, you cross the centerline on a curve on Route 101 and hit a car driven by a thirty-two year old electrician.  His car is totaled and the young father is totally disabled.  It isn’t necessary to draw out the story; only sufficient to note that your auto insurance coverage may only dent the hospital bills and hardly begin to cover the total liability assessed.  There are two catastrophes in this scenario – the injury to the victim and the fact that a judgment against you could easily take not only your net worth, but your future earnings.  

An umbrella policy is a reasonable way to manage the risks associated with this sort of scenario.  Umbrella policies are inexpensive because they are activated only after you have exhausted your liability coverage under your auto or homeowners policy.  Think of it as a catastrophic policy with a deductible equal to the amount of liability insurance you already have.  There are some requirements.  Most insurers will require you to have a higher limit than the minimum coverage in our example – $300,000 or $500,000 in liability coverage on your car and home, for example.  However, if you have $500,000 in liability insurance on your auto policy and a $1-million umbrella policy, you will have $1.5 million in liability coverage and the $1 million added will cost only a small fraction of the total bill.  

The first $1 million of umbrella coverage can cost as little as $200 and the price generally declines with higher limits.  More importantly, this is not a coverage that protects the interests of your mortgage holder or the state; it is a coverage that protects you and your family against financial catastrophe. 

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