Why do I need umbrella coverage?
Driving home after work, your mind is wandering: thinking about your daughter’s game that night, getting your bills paid, or mowing your lawn. Suddenly, a car cuts in front of you, and in an effort to avoid a crash, you hit another motorist, a highly paid surgeon. She’s injured badly, and cannot return to work. She files a lawsuit and the case goes to trial, where the jury awards a large settlement. In order to cover the costs, the court takes your savings, your home and requires you to give up a part of your salary for years. You’re wiped out financially.
You might be surprised to learn that most insurance policies don’t protect all of your belongings. There is a type of coverage that could help people avoid this situation: an umbrella policy. This additional layer of insurance, known as umbrella or excess liability coverage, offers additional liability protection above and beyond traditional auto and home insurance policy limits. You don’t want to find out after a lawsuit from an injury or accidental death that your insurance coverage was insufficient.
What is an umbrella policy?
An umbrella policy is an insurance policy that provides coverage after the limits of your home and car insurance policies are exceeded. Coverage levels usually start at $1 million, and in most cases, policyholders add this policy onto current coverage using the same insurance provider. An umbrella policy could provide coverage if you’re sued for an accident or incident that: occurs on property you own, involves your vehicle or a situation for which you could be considered liable. It can also pay for medical, court or other expenses you may be required to pay.
Factors to consider
Do you have a dog? A pool? Do you and your family like to entertain? If you have potentially dangerous items around your home an umbrella policy would be a wise investment.
Do you have a large amount of assets? These can include real estate, retirement savings or an investment portfolio, expensive collections and cars. To protect them you would need an umbrella policy, as most policies cover only a portion of these assets, with any real estate you own, personal property and sometimes wage garnishment making up the difference.
To be safe, many experts recommend at least a $1 million umbrella policy to provide liability coverage, even if someone's assets total less than $1 million. This amount of coverage is recommended because should you be sued, you could be forced to pay a legal judgment from your current assets and future earnings if your coverage was insufficient. An umbrella policy can also pay for defense costs, which can protect your finances if you are involved in a lawsuit.
All things considered, umbrella policies are relatively inexpensive for the amount of coverage they can provide if needed. A quick way to determine if you have enough coverage with your standard policies is to add up the value of your assets, and see if it exceeds the amount of coverage you have. If it does, it’d be a good idea to get umbrella coverage to supplement the difference. One final thing to consider: if you already have an umbrella policy, make sure the coverage amount is up to date, as your assets may have increased from when you purchased the policy.
Source: Kiplinger.com; smartmoney.com; forbes.com