Umbrella insurance means just what it suggests — it is a policy that provides additional coverage for homeowners’ insurance and auto insurance. In an automobile accident, the injured party will typically sue for all sorts of damages trying to win the lawsuit lottery on a high net worth individual. Should a judgment or a settlement come down in excess of the limits of the auto policy, the umbrella policy comes into play as additional insurance allowing the insured to protect his or her savings and other financial assets.
For anyone who is a sole proprietor, business owner, or a seriously active volunteer, has a high net worth, or is the spouse of such a person, umbrella insurance should seriously be considered. Umbrella insurance is very cheap and usually can be justified as a legitimate insurance expense of a business or for a person with heavy volunteer obligations. As a precursor to the umbrella insurance, the insurer will typically require that the homeowners and auto insurance coverage be at certain minimum levels before the umbrella insurance kicks in.
Usually, the amount of umbrella insurance is well in excess of the net worth of the individual or couple insured so that an individual/couple cannot be wiped out by the judgment or settlement.
Scott Anderson, CPA, CFP®, EA is the CFO and Vice President of Tax Strategies for GW Financial, Inc. He earned his MBA from Stanford University. Scott has spent over 35 years in corporate accounting and finance, including experience with several entrepreneurial opportunities in venture capital startups and corporate turnaround situations. He has served as Chief Financial Officer for two emerging public companies and has his own active practice in tax, financial, and investment planning for individuals and small business owners.