What Is Legal Insurance — and Do You Need It?

Legal stuff happens.

You might not expect to need a world-class criminal defense lawyer in your lifetime — and you might hope to never need a quality divorce lawyer.

But most adults incur smaller, less headline-grabbing legal expenses every year: We sign contracts, write a will or dispute traffic tickets.

We may even run into unexpected legal disputes that’ll never make it into a “Law & Order” script, like The Case of the Home Builder Who Misses Deadlines. Or, you know, bankruptcy or unfair landlords.

These events have an unwelcome impact on our wallets, too. So, as is the case for just about any unexpected potential expense: There’s insurance for that.

This guide will tell you everything you need to know about legal insurance, what it covers, whether it’s worth it, how to get it and alternatives to consider before signing up.

What Is Legal Insurance?

Legal insurance covers unforeseen expenses related to a legal case, including attorney fees, court fees and other related expenses.

This type of insurance is known by many names; these all refer to the same class of insurance product:

• Legal expenses insurance
• Personal legal insurance
• Legal plan
• Prepaid legal plans
• Legal protection insurance
• Group legal services insurance (if the plan is through an employer or association)

Legal insurance is not the same thing as the liability insurance you’d buy as a business owner or the coverage included with home insurance or vehicle insurance.

Liability insurance covers claims you owe in case you’re responsible for some kind of damage to a person or property, like medical bills. Legal insurance is designed solely to cover fees for legal services.

How Does a Legal Insurance Plan Work?

How your legal plan works depends on the policies of your insurance provider.

Depending on your policy, you might receive your coverage in the form of straight-up payment (as with health insurance), reimbursement (as with most pet insurance) or as a discount on legal services.

Some legal insurance providers even provide services themselves — that’s usually in the form of a law firm or legal services company offering prepaid legal plans.

Most legal plans come with an annual premium or semi-annual premium and cost around $100 to $300 per year.

An employer, union or other membership association might offer a group legal plan as part of your benefits package, similar to health or disability insurance. In that case, how much you pay depends on how much of the premium your employer or association covers.

When you need legal services, you can tap into attorneys in your insurance network for advice and representation. Some things you’ll encounter:

• Provider network: You’ll deal with a limited network of legal services providers. This might be limited to the company that provides the prepaid plan, or it might be a covered network of attorneys participating in your plan, like you have with health insurance.
• Financial benefits: Your plan might include full coverage for certain services, special rates for others and set discounts for yet others. Get familiar with the policy to understand your options before enlisting legal help.
• Out-of-pocket costs: Depending on your policy, you may be responsible for some out-of-pocket costs, like document filing fees or court reporters’ fees.
• Limitations and exclusions in coverage: Most policies exclude at least some areas of legal services, so check yours to make sure it covers what you’re most at risk of encountering. For example, if you’re married or expect to be, look for a plan that covers family issues like child custody and divorce. If you’re a homeowner or have significant assets, look for estate planning.

What’s Covered & What’s Not

What your legal insurance covers depends on the terms of your policy, so get familiar with it before buying in.

Legal insurance plans typically offer coverage for the cost of consultations, advice, legal assistance and representation, and preparation of legal documents. They cover matters like:

• Estate planning
• Will and trust
• Home buying
• Home-related contractor disputes
• Power of attorney
• Tenants’ rights concerns
• Marriage and divorce
• Adoption
• Child custody and child support
• Bankruptcy
• Debt refinancing and debt collection issues
• Traffic tickets
• Financial contracts and legal agreements
• Lawsuits
• Tax advice
• Employment disputes
• Employment agreements

Note that an employer-sponsored plan probably won’t cover disputes with your employer (though a union plan probably will).

Sometimes legal insurance coverage is included or available as an add-on with another insurance policy, like homeowners, renters or auto insurance.

In that case, it most likely only covers legal matters related to whatever the main policy covers. For example, a legal insurance add-on to homeowners insurance likely covers things like contractor disputes, but not divorce or bankruptcy.

You can’t typically get coverage for something that’s already happening — say, you’re in the middle of an adoption and realize the legal costs too late. But legal insurance often covers unsurprising expenses you can expect to incur in the future, like estate planning and contracts.

The decision to buy insurance or not is always a gamble. If you don’t buy it, you’re betting on not incurring costs greater than the premiums you’d have paid. If you do buy it, the insurance company is betting on you not incurring costs greater than the premiums you pay.

Some benefits of having legal insurance include:

• Peace of mind. As with any insurance, having it might simply relieve some stress. You know you can pop in and get services when you need them, so the cost of premiums could be worth it even if you never use it.
• Employer benefit. If you can get legal insurance with the premiums covered by your employer, you don’t take on the risk signing up.
• Spread out the costs. Even if a legal plan doesn’t save you money in the long run, you could benefit from having your costs spread out. Paying $100 to $300 per year might be more feasible for you than paying $5,000 at once when a case comes up.

Some drawbacks of buying legal insurance include:

• Low-cost services. Many of the cases typical legal insurance covers are relatively low-cost services, like drawing up a will or disputing a traffic ticket. You could spend thousands of dollars over your lifetime on premiums and only ever benefit from legal services that would have cost you a few hundred bucks.
• Capped benefits. Even when higher cost services are covered under a plan, the benefit is often a discount, rather than full coverage.
• Limited network. Even if you encounter a higher-cost scenario, like a complicated divorce or an employment dispute, you might not have access to high-quality legal representation through a network attorney.

How to Get Legal Insurance

Want that coverage?

You can find legal insurance plans through:

• Your employer: Some companies include legal insurance as an optional benefit and cover some or all of the premiums for you and your family.
• A union or trade association: Instead of directly from an employer, you might have access to a group legal plan through a union or association you’re a member of.
• Legal services companies: The most common place to buy prepaid legal plans is through online legal services companies, like LegalZoom or Rocket Lawyer.
• Insurance brokers: Despite the name, insurance providers themselves don’t typically underwrite legal insurance plans. But some insurance brokers (especially online) can hook you up with legal insurance through partnerships with legal services providers.

Alternatives to Legal Insurance

Personal finance experts don’t tend to looove legal insurance.

Given that average legal costs are pretty low and covered services are inconveniently limited to the cheapest stuff, it kinda looks like a racket to anyone who does the math (and runs the regression analysis and cross-tabulation and whatnot…).

If you want to pay for that peace of mind — or, even better, if your employer wants to pay to give it to you — go for it.

The most financially sound option, however, is an emergency fund.

Building up a savings account for rainy days (or traffic tickets) can give you the same peace of mind as insurance without taking the money away from you. You can use emergency fund cash on anything, so you don’t risk throwing away money to prepay for legal services you never use.

For small legal fees, like preparing a will, you might also be able to pay with your credit card and earn rewards points. If you can pay the balance off quickly, that service would cost you a lot less in interest than legal insurance would cost you in premiums over the years.

Dana Sitar (@danasitar) has been writing and editing since 2011, covering personal finance, careers and digital media.

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