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When most people consider their insurance needs, only certain types of coverage typically come to mind. Health insurance and life (or sometimes disability) insurance protect you and your loved ones; car and homeowner's or renter's insurance protect your major tangible assets.
Personal liability insurance, frequently called an "umbrella" policy, seldom makes this list. But when a rainy day - or an expensive lawsuit - turns up, sometimes nothing but an umbrella will do.
As the name suggests, personal liability coverage mainly exists to protect against claims of liability. In most cases, that means finding yourself, and your assets, the target of a civil lawsuit. A personal liability policy may seem like overkill for individuals who already hold three or four insurance policies. It is true that not everyone needs such protection. But an umbrella policy effectively defends your assets and future income against damage claims that can arise from a wide variety of scenarios. Much like flood insurance for beachfront property, liability insurance is a product you hope you never need to use, but one which can create substantial peace of mind in the meantime.
Who Needs Liability Insurance?
Some level of personal liability coverage is built into homeowner's (or renter's) insurance and auto insurance. For many people, this may be sufficient. In part, this is because some types of assets are shielded by state and federal law. For instance, a court cannot force you to use qualified retirement accounts, such as 401(k)s, to pay a legal judgment, and most states have laws protecting traditional IRAs. Some states protect Roth IRAs and other retirement accounts, too. Many states also protect your primary residence, though the precise rules vary; Florida, for instance, offers very strong protections in this area, while other states may only shield a certain level of home equity.
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You also protect certain assets from lawsuits through estate planning tools, such as properly structured and funded irrevocable trusts. However, be wary of setting up such trusts directly after an incident you fear may trigger a lawsuit. If it looks as if you are simply trying to dodge future creditors, the courts could determine that the asset transfer is fraudulent, rendering these assets available to pay a judgment.
If you don't have many assets outside your retirement savings and your primary residence, then your existing liability coverage may be sufficient. But second homes and nonretirement investment accounts are vulnerable. High income earners, and their spouses, may also want to consider their coverage options, since courts have been known to garnish wages to satisfy judgments.
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