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There are many reasons to consider an umbrella insurance policy. Just the word “umbrella” indicates that the policy’s reach goes beyond standard homeowners and auto insurance, protecting you from excess liabilities. But many consumers don’t understand just how valuable umbrella coverage can be.
Policy Ins and Outs
An umbrella policy provides an extra layer of insurance that comes into play once your homeowners or auto insurance policy limits have been met. Say a guest is injured tripping on your stairs, a driver in your household is at fault in an automobile accident or your dog bites a neighbor’s child. In addition to medical and repair expenses, these events could lead to a lawsuit that might quickly exhaust your regular homeowners or auto coverage.
Even if you prevail in a legal proceeding, you’d likely run up a costly legal bill. Lose, and a settlement could wipe out your home and other assets — even a portion of your future earnings.
Of course, you could simply boost the coverage limits on your auto and homeowners insurance. But that would likely increase your premiums on both policies and still might not provide the protection you need.
Most umbrella policies cover incidents involving your home or automobile. And many cover claims that fall outside these policies’ coverage. An umbrella policy might cover, for example, a lawsuit for slander resulting from an offhand comment made at a neighborhood gathering.
It’s All About Coverage
When a loss occurs, the first insurance policy against which claims will be made typically will be your primary homeowners or auto policy. Once that coverage is exhausted, the umbrella policy generally kicks in.
Most umbrella policies cover injuries to other parties, including guests in your home and motorists. Many also cover damage to property, including your vehicles, homes and other items. Finally, these policies usually cover the cost of defending yourself in a lawsuit and any settlements or payouts that result.
All the same, an umbrella policy isn’t a potential blank check to cover any liability. For starters, many don’t cover business incidents. If you operate a home-based business, for example, you’ll want to obtain coverage separately. Similarly, few umbrella policies automatically cover employees on your property, such as cleaning people or child care providers.
When calculating the needed amount of coverage, consider several factors. First, there’s your net worth. The higher it is, the more coverage you’ll want. In addition, consider the number and ages of drivers in your household. If you have several drivers, particularly if they’re younger, go for more coverage.
Last, take a look at any items that might attract a lawsuit. For instance, if you have a backyard swimming pool, consider boosting the amount of coverage.
Many umbrella policies offer coverage starting at $1 million. Before assuming that $1 million is adequate, tally the value of your assets, including your home, personal possessions and investments. Your total may be considerably over $1 million. What’s more, a settlement from a lawsuit could exceed your net worth. As a result, a higher level of coverage may be prudent.
When you’ve determined an appropriate level of coverage, review it every year or two. Why? Because, as the value of your assets changes, your coverage should follow accordingly.
Considering the Cost
Umbrella policies can be relatively inexpensive. A $1 million policy might cost only a few hundred dollars annually. Premiums can vary, based on the amount of primary insurance coverage you have, where you live, and your driving record and credit history.
It typically makes sense to purchase umbrella coverage from the company that issued your homeowners and auto insurance policies. Most insurers offer discounts for purchasing multiple policies. In addition, buying the policies together will make it easier to coordinate coverage.
Peace of Mind
The chances that you’ll face a liability in excess of your standard homeowners and auto coverage might not be huge. But if you ever do, you’ll likely find that purchasing umbrella insurance was one of the best decisions you ever made. And just knowing that you have such protection in place can give you invaluable peace of mind even if you never end up needing the coverage