After a long and hopefully successful career as a CPA, you’re looking forward to enjoying retirement on your own terms. Whether you want to travel, volunteer, explore new hobbies, or elevate your social life, retirement can be an extremely rewarding life phase. It can also come with an untold number of risks, especially to the personal assets you’ve worked so hard to earn.
Your professional risk factors may drop dramatically after you leave the workforce, but your personal liability could actually increase — especially if retirement includes buying a boat, managing your rental properties, hosting events at your home, or installing a pool. Here, we’ll take a deeper dive into umbrella insurance policies in retirement, how they work, what coverage they can offer, and if they’re worth it when you’re no longer earning an annual salary.
How Umbrella Insurance Works in Retirement
As the term ‘umbrella’ suggests, an umbrella liability policy extends the limits on your personal property and casualty policies, such as your auto, homeowners, boatowners, recreational vehicle, or motorcycle policy. These underlying policies will be exhausted once they’ve reached their liability limits, which means you could be footing the rest of the bill — unless you have personal umbrella coverage.
Umbrella insurance covers what’s left over after you hit your standard policy limit. For example, if you’re found at fault in a car crash that causes personal injury to another involved party, your auto policy will only cover up to a certain amount. In this case, we’ll say that the limit is $300,000. But if the actual damages from the accident add up to $1.2 million, you’ll be on the hook for the remaining $900K. However, if you have personal umbrella coverage with a policy limit of $2 million, the rest of those damages would be paid in full.
Umbrella coverage could offer necessary financial protection for retirees with high-value personal assets. While qualified retirement plans like 401(k)s are typically exempt from court judgments, you could still lose your retirement savings if you find yourself at the center of a personal liability lawsuit. After working so hard for so many years to protect and grow your nest egg, you don’t want to leave it vulnerable in your retirement.
Cost vs. Benefit for Retirees on a Fixed Income
As a CPA, it’s likely you’ve set yourself up to be relatively comfortable throughout your retirement. However, one unexpected catastrophic incident could wipe it all out with a single lawsuit. An umbrella liability policy could be the key to protecting your assets and providing you with valuable peace of mind during this stage of life.
While policy costs vary widely, umbrella coverage can certainly be worth the investment, especially if you have valuable personal assets you want to protect (homes, rental properties, boats, etc.). Most umbrella policies start at a $1 million coverage limit and increase in $1 million increments. The first $1 million in coverage typically costs the most, with each additional increment adding less to your annual premium than the one before. As an example, if a policy costs $300 annually for the first $1 million of coverage, the second $1 million may cost an additional $150, and the third may cost $75, and so on.
It is important to note that to qualify for an umbrella policy, you first need to meet a minimum liability limit on your standard insurance policies. This limit is usually higher than average policy limits and may result in higher premiums.
While it costs more to add umbrella coverage, it can be an invaluable asset and complement to your homeowners insurance, car insurance, boat insurance, or other policies.
Pros and Cons of Umbrella Insurance Coverage for Retirees
Wondering if umbrella personal liability coverage is the smart choice to give you extra peace of mind in your retirement? Consider the upsides and the downsides to better understand if this type of insurance is right for you.
Pros
The pros of umbrella policies for retirees include:
- Additional coverage that goes beyond standard insurance policies
- Coverage for legal fees and defense costs in the case of litigation
- Protects the financial security of retirees with significant assets, high net worth, and established wealth
- Covers bodily injury and property damage, but also covers claims standard policies don’t, like defamation, slander, libel, and false arrest
- Typically applies to all residents of your household
Cons
Of course, there are some downsides you should be aware of when considering purchasing an umbrella liability insurance policy, including:
- The cost of raising your home insurance or other policies in order to qualify for umbrella coverage
- The fact that your personal losses will likely not be covered by the policy, including medical bills, property damage, or financial loss
- The risk of paying for coverage you don’t need if your liability limits on existing policies are sufficient for your risk level and lifestyle
Do You Need Personal Umbrella Liability Insurance?
There is no hard and fast rule when it comes to whether a retiree needs umbrella coverage. However, there are a few factors that can help you determine if this coverage is necessary. If you:
- own multiple private properties or rental properties,
- have high-risk hobbies or amenities like boats, swimming pools, or RVs,
- drive frequently or drive very long distances,
- have a high net worth and substantial retirement savings that exceed the liability limits on your existing policies,
- travel internationally on a regular basis, or
- have a teen driver or inexperienced driver in your household…
… then you may want to give serious consideration to umbrella coverage.
Additionally, as you get older and attain retirement age, here are some things to consider that may impact your liability risks:
- When driving, your night vision and reaction times are not as good as when you were younger.
- Though your children are grown, you may find yourself driving your grandchildren to activities.
- Retirees often take on volunteer work, which may entail driving with passengers in their vehicle.
- You may decide to travel, which may mean more time behind the wheel in unfamiliar locations.
- If you own a second property, you may find yourself making more trips there or taking on the responsibility of being a landlord.
- You may find yourself spending more time on social media. Though rare, libel/slander claims do occur and are covered under an umbrella policy.
Umbrella Coverage vs. Increasing Liability Limits
You might be wondering if it’s enough to simply raise your limit on your auto, boat, or homeowners policy rather than adding an umbrella policy. In some cases, that might be sufficient, especially if you live a low-risk lifestyle or if your assets are worth less than your existing policy limits.
However, it’s important to remember this: expanding the liability limits on an existing policy only extends the coverage paid out on that one policy. For instance, in the case of a car accident, your auto policy will pay up to its limit, but your homeowners policy won’t pay anything. How it works is this: an umbrella policy sits over all your existing policies, and will pay out no matter which one the liability claim goes through.
For maximum ease and peace of mind, an umbrella policy is a comprehensive and effective solution that protects your nest egg without putting too much strain on your bottom line.