What Is An Umbrella Insurance Policy And Do You Need To Buy One?

By Michael Diaz. May 7th 2016

People buy insurance policies to protect themselves and their families from unexpected events that could end up costing them a significant amount of money. Homeowner and automobile insurance are two types of insurance policies that help to reduce the risk of financial liability. However, what many people do not realize is that most insurance policies do not cover their entire financial risk. This creates a coverage gap. The function of umbrella insurance coverage is to close this gap by offering you protection from financial liabilities that are incurred after your other insurance policies are exhausted.

What Is An Umbrella Insurance Policy?

Most insurance policies only provide coverage up to a fixed dollar amount after which the policyholder is responsible for any and all additional costs. Umbrella policies protect you by covering any costs that you incur after your other insurance policies cap out. Umbrella policies can be purchased in coverage increments of one million dollars. A one million dollar policy is typically the minimum amount of coverage you can buy.

How It Works

Imagine that you get into a car accident with another driver who is significantly injured after the crash. A judge rules that you are responsible for the accident and that you must pay for the other driver’s hospital bills. Additionally, since the other driver will never be able to go back to work, the judge determines that you must pay her a multi-million dollar settlement to compensate her for the lost income she would have otherwise received had she not been injured. Since your auto insurance policy caps out at five hundred thousand dollars, you are now personally responsible for paying the rest of the multi-million dollar settlement. Unless you happen to have millions of dollars sitting in the bank or have substantial assets that you can sell, you are in serious financial trouble. The judge can force you to empty out your bank accounts, sell your house and even garnish your wages in order to pay the settlement.

But what if you have an umbrella policy? Your umbrella policy will step in after your auto insurance caps out. It will cover your legal fees and pay out the rest of the settlement. Your bank accounts and assets are safe. Financial ruin is no longer an imminent possibility.

In addition to providing protection from auto injury claims, an umbrella policy can also help to protect you if you get sued because of an accident that happens on your property or on your recreational vehicles. It also covers you for slander and libel suits.

Who Should Consider Buying An Umbrella Policy

You might want consider getting umbrella coverage if:

  • You have a high risk of getting sued for personal injury. This includes people who spend large amounts of time driving, frequently entertain guests at their house or own a dog. It also includes those who often engage in other relatively risky activities.
  • You own a small business. An accident in the workplace could end up costing you a fortune if you must pay for damages that are not fully covered by your insurance.
  • You have significant assets that you want to project. In the event that you get sued, an umbrella policy can help protect your home, savings, cars, and other valuable assets.

Costs

Umbrella policies are surprisingly inexpensive when compared to the costs of homeowner and auto insurance. For example, a one million dollar umbrella policy typically costs between $150 and $500 dollars a year. This is only a fraction of typical annual homeowner and car insurance costs. However, be aware that some insurance companies require that you have a certain amount of existing coverage before they will sell you an umbrella plan. Make sure that you shop around for the best deal on an umbrella policy. You can often receive discounts by purchasing all of your insurance policies from the same provider.

Don’t Be Underinsured

If you have decided to buy an umbrella policy, make sure that you buy enough coverage. You do not want to find out that you are underinsured after you have been ordered to pay someone millions of dollars in damages. You should consult with your insurance agent about what the appropriate amount of coverage is given your assets and risk profile. Also, it is important to remember that if your wealth grows, you should probably consider increasing your coverage amount to ensure that your assets remain adequately protected.

Don’t Get It If You Don’t Need It

If you do not own your home and have relatively few assets, then it might not make sense for you to buy an umbrella policy. This is because you have less to lose in the event that you get sued. Take a personal inventory of your assets and decide whether it makes sense for you to purchase additional coverage. You can also enlist the advice of an insurance agent to help you decide if an umbrella policy would be appropriate for your financial situation. Don’t forget that anyone can get sued for anything regardless of how valuable their assets are. If you are particularly risk averse, an umbrella policy can give you peace of mind.

Sources:

New York Times

CNN

Smart Money

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