It’s appropriate that today is National Umbrella Day! Because, in honor of this underappreciated “holiday,” we have asked our friend, Kevin Fox, a principal at the Capstone Insurance Group, to discuss Umbrella Insurance and its potential tax benefits. As you will see, such a policy can be well worth the investment.
What is umbrella insurance?
Umbrella insurance is a policy designed to provide an extra layer of liability protection, both for individuals and businesses, which goes above and beyond the liability limits provided by specified underlying insurance policies. Examples of underlying policies include general liability, workers compensation, homeowners and automobile insurance. Umbrella insurance can be secured for both individual/family protection (Personal Umbrella Policy), and for a business (Commercial Umbrella Policy). The name “umbrella” insurance stems from coverage having the ability to sit over numerous underlying policies, even those with differing insurance carriers.
How much umbrella insurance should I carry? What are the costs?
The limit of umbrella insurance that should be carried by individuals and businesses vary depending on the situation. Typical umbrella policy limits can range from $1 million up to and beyond $100 million. The personal net worth for individuals and annual revenues for business are two common determinants of how much umbrella insurance one should carry. Since these policies are not the “first line of defense” for liability claims, umbrella policies are relatively inexpensive for individuals – national averages are about $380 per year to secure a $1 million to $2 million personal umbrella insurance policy. Because the majority of personal umbrella insurance claims are related to automobile accidents, families with youthful drivers in the household may pay more for this coverage. However, the protection is well worth the cost. The cost of commercial umbrella insurance can vary drastically depending on the inherent risk exposures of the business, but also is more inexpensive per-million compared to the underlying liability policies.
It can sometime be difficult for individuals and businesses to justify the cost vs. benefit of umbrella insurance, especially if they have never been involved with a large insurance claim. “Jury Verdict Research” shows that 13% of personal injury liability awards and settlements are $1 million or more. A judgment of that size would only be partially covered by underlying insurance policies and, without the protection of an umbrella policy, would force the insured to pay the remainder of the judgment out-of-pocket. The end results for both businesses and individuals on the losing end of these verdicts can be devastating.
Are there any tax benefits to umbrella insurance?
The majority of personal insurance policies are not tax deductible, including homeowners, automobile, and umbrella insurance. Most commercial insurance policies are tax deductible as a business expense. One particular gray area in the tax treatment of insurance policies is for the owners of rental or investment properties. If an individual owns properties and rents them as an income source, they are conducting a business transaction. The annual premiums being paid for umbrella insurance on these types of properties may be tax deductible. Umbrella policies for those who serve as a director on company boards may also be tax deductible. We advise individuals in these situations to consult with their insurance advisor and/or tax professional for more information.
Thank you to our friends at Capstone Insurance Group for this overview of umbrella insurance. Somewhere, it’s raining and an umbrella is needed. It works the same for large liability claims. Talk to your financial advisory team, including your tax and insurance expert, about your umbrella coverage needs.