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Personal liability insurance, also referred to as personal umbrella insurance, is another product we use to keep our assets in tact. Since we live in a litigious society, we believe that it's a good strategy to have an insurance policy that can withstand a financial blunder caused by a lawsuit.
What is personal liability insurance?
Your homeowner's and auto insurance policies have added liability protection within their contracts. If you are found negligent in a situation where someone was injured, your liability protection will pay for things like personal medical bills, rehabilitation, lost wages, etc.
However, the coverage amounts are relatively low and can be quickly exhausted depending on the severity of the other party's injuries.
Protection from a personal liability umbrella insurance policy will trigger once the liability protection from your other policies are no longer sufficient. It gives you and your assets added protection.
How about an example of where this policy is important?
Let's say Bill injures Anne in a car accident. Due to the severity of Anne's injuries, she is now disabled and cannot return to work. Her medical bills are $50,000.
Good news and bad news. Good news: Bill's auto insurance policy has liability coverage of $50,000. Bad news: Do you think Anne and her attorney will only go after $50,000?
Not likely. Remember...
She can no longer work and provide for her family. She can no longer fund her retirement. She has ongoing medical bills she will have to pay because of her disability. Along with financial hardship comes emotional distress. So if you consider her lost wages for 20 years, medical bills, retirement, and personal therapy, you're looking at the possibility of millions of dollars. If Bill doesn't have personal liability insurance, then his assets are exposed.
So what does exposed mean? They could go after your house, cars, boat, bank accounts, 401k, etc. Any asset owned under your name is at risk.
But you don't even have to be "physically" involved in the scene of the injury to be at risk. If someone gets injured at your home and you are held liable of the damages, then your assets are at risk if you don't have sufficient coverage.
This article isn't meant to scare you. It isn't meant to invoke fear. We encourage you to take preventative measures. We want to inspire you to take action in protecting your wealth. Like putting on your seatbelt in a car, an umbrella policy is an additional layer of protection.
My wife and I have an umbrella policy that provides $5 million in excess, above the coverage that our home and auto policies provide. We only pay $531 a year for the policy. As you can see, the premiums are relatively low.