What Is Personal Liability Insurance? (And How Much to Own)

by Neal Frankle, CFP ®

Personal liability insurance protects your assets by paying claims and damages in case you injure other people or property. It’s very different from life insurance protection.

The good news is that if you have automobile, renters or homeowner’s insurance, you already have some liability coverage.

Usually, the liability coverage that comes along with these policies is very limited. That’s why you should look into an umbrella policy (which is another name for personal liability insurance).

Umbrella policies provide extra coverage from $1 million and up. These policies pay when your basic coverage stops paying. In other words, the insurance company that sold you the umbrella policy only has to pay claims if those claims exceed your basic coverage.

Let’s assume you are sued by someone who slipped in your gazebo. They sue and get a judgment against you for (evil laugh) ONE MILLION DOLLARS. Fortunately, you’re smart. You have the right coverage, and you don’t have to worry about losing all the money you’ve saved for retirement.

You have a homeowner’s policy that covers this liability, but only up to $500,000 (for this example). In this case, the umbrella policy covers you for the $500,000 the basic policy doesn’t.

This is the reason why umbrella policies are so darn cheap – they only pay after the basic coverage has tapped out. That’s because the odds of being sued are small and the odds of being sued for an amount above your basic coverage is even smaller. Again, this explains the cheap price, and the cheap price is one reason why you should have such a policy.

Besides being cheap, the nice thing about these policies is that they are portable. Wherever you are, you have the coverage. Just about the only limitation is that it doesn’t cover business liability even if you run the business out of your home.

But if you do run a business out of your home, you might be able to buy riders and/or additional coverage based on your personal liability coverage, which is much cheaper than buying business liability insurance. I’ll be writing about business coverage tomorrow.

Do you need an umbrella policy to cover your personal liability risks?

Maybe.

If you have young children, for example, you might need a policy because they have lots of friends. These little tikes might get into some mischief and hurt themselves at your home. If so, you’re at risk of being sued.

Do you have people over often? Do you drive like a maniac or a Parisian? Do you have firearms on your premises? Do you have gardeners and housekeepers on the grounds? All these are reasons why you might want to own an umbrella policy.

The way I see it, personal liability insurance is so cheap, it makes sense to have this coverage. Do you own an umbrella policy? If not, why not?

 

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