General insurance is a hard sell for most people. Because? Because the concept of a catastrophic event that can be a game changer for your life and comfort is not something most people stop at. Also, the concept is more abstract than saying, as it covers a specific asset like the home and your car or boat.
However, if you have assets worth protecting or substantial income, you should seriously consider purchasing a decent amount of blanket coverage. Many people think it’s a waste of money, others think it’s all too good to be true, it’s not going to be there if you really need it. However, others believe that nothing catastrophic will ever happen to them.
In fact, one very smart and successful businessman told me, “Listen, if I can’t even calculate my overall risk, how the hell can I insure against it?”
He’s partly right. In all other insurance cases, you have a method of calculating your final loss. Damage to the car, loss of life (yes, income risk can be monetized through actuarial tables), home, personal items… everything can be quantified. And so it makes sense to insure against that.
But how do you quantify a disaster?
And yet, I have seen people’s lives turned upside down by a catastrophic event. This is how you insure for that type of risk.
First, let’s get something clear. A general peril does not cover such things as medical bills, unemployment, loss of life, tax liability or fines or disability. It covers you for the following types of liability:
- personal injuries
- Legal defense costs
- Responsibility related to oneself
- Damage to property
- Personal liability such as defamation or slander charges
In other words, umbrella insurance overlaps with your other specific risk insurance policies. So a dog bites someone while he’s on his property and they sue him, those damages are covered.
So how to assess the amount of risk. Well, a general rule of thumb is 10 years’ income and the market value of your assets plus the normal rate of inflation. If you have $5,000,000 and expect to make $2,000,000, you would insure yourself for around $10 million.
Most umbrella policies have certain exclusions. Check them very carefully. Common exclusions are: damage to your property (covered by homeowners insurance), self-inflicted and intentional damage, and damage arising from certain exotic vehicles.
Like I said, review the exclusions very carefully and also the reasons why the policy can be cancelled.