A Bad Day or a Bad Life?

As a financial planner I am often asked whether or not a personal liability umbrella policy is worth the price. Generally, my answer is a resounding “Yes!”

Personal liability umbrella policies or PLUPs (for the remainder of this article) are insurance policies that provide coverage above and beyond the underlying liability limits on an individual’s or family’s auto insurance or home owners insurance. PLUPs can also be purchased by folks that have renters insurance or condo insurance policies. PLUPs are usually purchased in $1 million limits starting at $1 million.

Umbrella policies work like this: Generally the person applying for the PLUP has their auto and or home insurance with the insurance company they are considering purchasing the PLUP through. What the insurance company will do is require that in the underlying auto policy that the personal liability (if a member of the insured household is liable for damages in an auto accident) of the policy be at least a specific amount – often $250,000 or higher.

Likewise with the home policy; the insurance company will require the liability coverage of the home be at least a certain amount – often $300,000 or higher. These amounts must be exhausted first before the PLUP will pay.

Should the insured be liable in an auto accident or accident at the home (trample injuries or pool incidences are common) the insurance company will pay from the auto or home policy first and any damages left over are then recovered from the umbrella policy. Liability in an auto accident or home accident cannot be interchanged (you can’t use home liability for an auto accident and vice versa).

Let’s look at an example. Suppose Danny was driving his car and crossed the center line and hit another car head on. All three passengers in the other car sustained serious injuries totaling $750,000. Danny’s auto policy is set up where it pays $250,000 of bodily injury per person and $500,000 total per accident. Assuming each person sustained $250,000 in damages, Danny’s policy would cover $500,00 of the damages and essentially ‘run out’ of money. If Danny doesn’t have an umbrella – he’s responsible for the remaining $250,000.

Luckily, Danny purchased a PLUP. With $1 million in umbrella coverage the umbrella takes care of the remaining $250,000 Danny is liable for – including any legal defense. Here Danny only had a bad day.

If Danny didn’t have the PLUP – he is subject to wage garnishment, seizure of assets, etc. until he pays what he owes. In other words, he’s got a bad life.

PLUPs may also cover liability in the event someone is liable but the act wasn’t caused while using the auto or home policies. Typically the PLUP will pay after the insured pays a self-insured retention (deductible) which may be anywhere from $1,000 to $5,000.

PLUPs are pretty reasonably priced and will fluctuate based on a number of factors. For example, a single person with one car, one home, no moving violations or at-fault accidents will pay a pretty cheap premium – about $150-$200 annually. A couple with two cars, a home, boat, ATVs, and teenage drivers will pay much more since there is more risk with the vehicles and teen drivers. They may be looking at $500-$750 annually. The premium will fluctuate according to the risk exposure.

Why are PLUPs generally so cheap? It’s because the underlying insurance requirement on the policies under the “umbrella” must be high. It’s rare that these higher amounts are exceeded and umbrellas are used. Insurance companies know that due to the low percentage of PLUPs that pay that PLUPs are cash cows for them and they can price them reasonably for their clients.

Are PLUPs a good idea? Yes. In the event that the worst happens, would you rather have a bad day or a bad life?