Don’t Forget Your Umbrella!

Not too long ago, a large storm ripped through Ann Arbor and surrounding communities. The storm took down power lines across the area, leaving many without electricity for days. Our office was one of those that lost power. Thankfully we had a plan in place should something like this occur. As a result, we were able to get up and running again quickly and go back to what we do best—serving clients.

When we made the plan for a low-probability, high-impact event like a power outage that lasts for days, we were engaging in a process the business community calls “Risk Management.” Taking the time to forecast a problem and minimize its impact is an example of what an old coach of mine use to call “The Five Ps.” Coach was referring to a simple sentence that has had a big impact, “Proper Preparation Prevents Poor Performance.”

When it comes to personal finance, there are a lot of things that you can do to make sure that you are properly prepared. One that is often overlooked is umbrella insurance.

Umbrella insurance is there to protect your assets if you are held liable for expenses that your regular homeowners, auto or watercraft policy won’t cover. In addition, umbrella insurance will cover things that those policies won’t, like libel or slander. The goal of this type of insurance is to provide you with an additional layer of protection to your insurance strategy.

For your umbrella coverage to start paying out on your behalf, your primary insurance will need to have been exhausted. For example, a guest in your home slips and falls. As a result, that person takes you to court and is awarded $101,000 in damages. Unfortunately, your homeowners insurance has a $1,000 deductible and will only cover the first $30,000 in damages. However, you remembered The Five Ps and made sure you had umbrella insurance. So, after paying your thousand-dollar deductible, the remaining $70,000 is paid for by the insurance company and does not come out of your pocket.

I understand that paying for insurance is not the highlight of anyone’s day. Afterall, insurance is one of the few things you pay for and hope to never use. The good news is that, because it is the last line of defense, umbrella insurance is very affordable. Often, you can purchase more than a million dollars of coverage for less than $500 a year. That’s a small amount to pay to protect a financial foundation you’ve spent years building.

The value proposal for umbrella insurance is also a simple sentence that has a big impact, “When the storm comes, it helps to have an umbrella to shield you from the rain.”

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