Wise investing is not the only ingredient to long-term wealth accumulation. Successfully building wealth also requires a rational risk management plan. While market risk is often managed through diversification and other market-based risk strategies, non-market events can present very real and substantial risks to an individual’s wealth.

For example, costly medical expenses are one risk many individuals manage with health insurance coverage. Often overlooked is another, potentially comparable source of wealth-destruction risk—large personal liability claims or judgments.

Personal Liability Risk

While a certain degree of personal liability protection is provided by auto and homeowners insurance, claims or judgments against an individual in excess of these policy limits will necessarily come from the assets owned by that individual. It’s a risk that has no theoretical ceiling.

Consider one simple example. A pedestrian is walking on the sidewalk past a neighbor’s home and slips and falls, suffering bodily injury, including head trauma. The homeowner is found to be negligent for failure to properly clear his sidewalk of ice. Our homeowner has protection against this form of liability up to a limit prescribed in the policy (e.g., $300,000). Unfortunately for the homeowner, the injured passer-by was a highly compensated professional who is now unable to work for six months and is suing for $1 million in damages. The homeowner is now facing the financial risk of a $700,000 liability exposure.

An umbrella policy attached to an auto or homeowners’ policy is a simple and inexpensive way to obtain protection against this potentially devastating possibility. Like health care insurance, an umbrella policy can be an important risk management tool for protecting an individual’s wealth and his or her future retirement security.

A Glance at Umbrella Policies

An umbrella policy covers a wide range of losses, including bodily injury (inclusive of medical costs and loss of income), personal injury (such as slander or humiliation) and property damage (including the loss of its use).

An umbrella policy will not cover business-related liability or damages, so business owners will need to obtain a separate business umbrella policy.

Typically, these policies may provide additional liability coverage of anywhere from $1 million to $5 million. Higher amounts are available, though not through all insurance companies, and will often be reviewed on a case-by-case basis.

The amount of umbrella coverage needed is unique to a person’s individual set of circumstances and needs, and working with a financial professional is an important first step in determining the appropriate protection needed.

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