HomeUtilitiesHow much liability insurance do I need?

How much liability insurance do I need?

People think only about certain types of insurance when they consider their insurance requirements. You and your loved one’s health insurance and life (or sometimes disabled) insurance provide protection. Your major tangible assets are protected by your car, homeowner’s, or renter’s insurance.

The “umbrella policy” of personal liability insurance is not often included in this list. Sometimes, an umbrella is all you need to protect yourself from a storm or an expensive lawsuit.

Personal liability insurance is primarily designed to protect against liability claims. That means you, along with your assets, could be sued in civil cases. Individuals who already have three to four insurance policies may find a personal liability policy unnecessary. This protection is not necessary for everyone. An umbrella policy protects your assets and future income from damage claims that could arise in a variety of situations. Like flood insurance for beachfront property and liability insurance, you want to avoid the need but it can give you a lot of peace of mind.

Who is entitled to liability insurance?

Homeowner’s (or renter’s) insurance includes some level of personal responsibility coverage. This may be enough for many people. This is partly because certain types of assets are protected by federal and state law. A court cannot forbid you from using qualified retirement accounts such as 401ks to pay a judgment. Most states also have laws that protect traditional IRAs. Some states also protect Roth IRAs, and other retirement accounts. Although many states protect your primary residence, the exact rules can vary. Florida offers strong protections, while other states may only offer a limited amount of home equity.

Estate planning tools such as properly funded and structured irrevocable trusts can help protect assets from lawsuits. You should be cautious about setting up trusts right after an incident that you are afraid could lead to a lawsuit. The courts may find that you are trying to avoid future creditors by transferring assets fraudulently and make these assets available for payment.

If you don’t have much other than retirement savings and your primary home, your existing liability insurance may be enough. However, second homes and non-retirement investment accounts can be vulnerable. High-income earners (and their spouses) may also be interested in reviewing their coverage options. After all, courts can garnish wages to satisfy court judgments.

Although the exact amounts will vary depending on where you live and what your insurance policy covers, homeowners insurance typically includes personal liability coverage up to $300,000. For bodily harm incidents, auto insurance usually covers $500,000 and up to $250,000 each. However, lawsuits for serious injuries can lead to settlements and judgments in excess of a million dollars. Here umbrella policies come in.

People tend to think that car accidents are the most common reason for lawsuits. However, car accidents can be very serious and can cause severe damage. However, there are many circumstances in which you may be liable for an incident. A party may be held at your house where one of your guests is seriously hurt. You may have your dog bite someone you don’t know. Employing household staff such as a nanny, home health aide or nanny, could lead to the employee being sued for physical injury, as well as for harassment or wrongful termination.

Other liability risks may not be obvious. Social media’s hyperconnectedness makes it easy to defame or libel someone. Preteens and teens could be at risk. They could become involved in cyberbullying incidents or harassment, which could lead to serious consequences. When teens are behind the wheel, they can also increase your liability. Even adult children can be subject to “vicarious negligence” statutes. This could make you personally liable for certain situations, such as when they borrow your vehicle and cause an accident.

A second area that many people neglect is the potential risk of serving on a board of a non-profit organization. Many non-profits are too small to offer any protection for members of the board in case the organization and its board are sued. Directors and officers insurance may be a good option for board members. This can also be used in place of or in addition to an umbrella policy. Increased liability coverage may be an option for people whose charitable work or professional activities put them in the public eye. This is due to the potential damage that a suit could do to their reputations, as well as to their financial health.

It is worth looking at the common law concept “joint liability” when assessing the need for personal insurance. A plaintiff can seek all damages from multiple defendants in many jurisdictions. This applies regardless of fault. The plaintiff can seek damages for 100 percent from any one defendant if all four are found equally liable. Lawyers often focus on the defendant with the greatest net worth in these cases because this is the best way to get the client the biggest payout.

How much liability insurance do you need?

You can see that individuals who have high net worth, high income potential, or both, should be concerned about their liability exposure. After you have made the decision to purchase an umbrella insurance policy, you will need to decide how much coverage you want.

Unfortunately, there is not a formula for determining the proper amount of coverage. It is a good idea to have enough insurance to cover your net wealth and future income streams. A Certified Financial Planner™ or an insurance agent can help you with such calculations, and there are also a variety of tools online designed to help you calculate a figure. While insurance companies may try to sell you more insurance than what you need, it is still useful to determine which factors could affect your coverage. Some of these are easy to see, such as your net worth or assets. Some are more immediate and concern about the possibility of accidents. For instance, if you have a trampoline, or pool, you may need more insurance. Premiums will be slightly higher.

It is always a good idea to shop around when making an insurance decision. However, there are real advantages to purchasing all or most of your insurance products through one provider. Consolidating your coverage will reduce administrative burden and make it easier for you to spot any gaps. If your homeowner’s policy covers $300,000.00 in personal liability insurance, but your umbrella policy doesn’t kick in until $500,000 then you will be responsible to pay the $200,000 between. Most umbrella insurance companies require that customers increase their base liability coverage in order to avoid such gaps. It can make it easier to file a lawsuit if you stick with one company. You won’t have two companies managing two different parts of your coverage. Bundling may also allow you to save money on your premiums for various policies.

The good news? In most cases umbrella policies are a great value. Companies can spread the risk among their customers because catastrophically large lawsuits are rare. Although the rates are not exact, coverages of $300-$500 per year can often provide $1 million. This number can fluctuate depending on how many homes, cars, drivers and locations a policyholder lives in, as well the area in which he/she lives. It is almost always true that the second million coverage will be less expensive than the $1 million you paid for the first. $5 million of coverage will be almost certain to cost less than $2,500 if $1 million costs $500 annually.

Personal liability insurance provides substantial peace of mind for such low premiums. Some policies offer additional benefits beyond the basic functions of the product. You may also find additional features such as not including legal defense costs in the coverage limit and offering reimbursement for fees incurred by public relations firms to manage the incident. Consider your personal needs and how you live. It might be worth looking at the features of a policy, along with cost.

The United States is a litigious country. While some lawsuits may be frivolous, many others are not. It is a fact that civil lawsuits can and do result in settlements or judgments exceedingly large. Judges and juries are not required to limit damages awarded to a party that they can afford. You have personal liability insurance that protects you against the worst case scenario, even if you are held completely liable.

Although it might seem redundant to add an additional insurance policy at first glance, people who have assets that are susceptible to creditors’ claims may find an umbrella policy economically sensible to help them protect against a rainy afternoon in court.


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