Umbrella Insurance
Let us do away with many of the myths surrounding umbrella liability coverage.
- Its just for the rich.
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Its too complicated to coordinate with your existing insurance such as your homeowners policy.
- The premiums are too expensive.
These myths are untrue. Umbrella liability is relatively affordable, can be easily coordinated with your existing insurance policies and by no means is it just for the wealthy. Umbrella liability insurance is so named because it acts like an umbrella, sitting on top of your auto and homeowners liability policies to provide extra protection. (Remember that you still need renters insurance to cover both your liability and your personal property even if you don’t own a home.) Some examples of where umbrella coverage is often used:
- An auto accident in which you are sued under your auto insurance policy.
- Your neighbor slips and falls on your property, and you are sued under your homeowners insurance.
- A natural disaster in which another person's property is damaged by, say, a tree on your property crashing down on their vehicle or home. This usually falls into the, "I thought that was covered by my homeowners policy" category.
Your auto and homeowners policies have at least some liability insurance that would be used to settle legal claims. But what if a settlement (or judgment, if it goes to court) is $800,000 and you only have $300,000 of liability insurance? The insurer would pay its $300,000, but where are you going to get the other $500,000? Virtually everything you own would be fair game to pay off the debt. The only good news is that some states protect certain assets (like your home) from being taken.
Worried?
With good reason. Taking into account America’s love for lawsuits, you can not afford to not have umbrella liability insurance.
Umbrella liability insurance pays $1 million, $2 million and sometimes even $5 million or more of a claim, on top of what your basic policies will pay. You are usually able to set the amount. For the protection you get, umbrella liability coverage is not very expensive. For example, premiums are usually $200 to $300 a year for $1 million worth of coverage. The cost depends on such criteria as the amount of coverage, the insurance company issuing the policy and your own "personal risk factors" (such as the number of traffic tickets you have received in the past few years, and possibly your credit report).
When people do buy, they often do not buy enough. For example, you may have assets worth $1 million, figure that you need enough coverage to protect your assets, and therefore buy a $1 million policy. But what if a judgment of $2 million is handed down? We often hear of juries awarding upwards of $20 million; it should be obvious that the amount of someone’s assets is not taken into consideration. You would lose all of your assets and still owe money in either of these cases. Your future income, if you have to make settlement payments over time, could easily be jeopardized. The same goes for any inheritance you may receive (it could easily be seized for payment), not to mention any inheritance you may want to leave your children.
How much you own is irrelevant when deciding how much to purchase. Do you live in a wealthy town, where you could be an easy target for a large settlement? Do you travel frequently? Do you entertain a lot? Do you operate a home-based business and have employees or clients coming to your home on a regular basis? (Many self-employed people wrongly assume that this is covered in their homeowners policy.) If you answered yes to any of these questions, it is important for you to have umbrella liability insurance.
Umbrella liability insurance usually carries a high deductible of $300,000 or more. It is designed not to kick in until your other policies are utilized. The illustration below shows how umbrella insurance is coordinated with your auto and homeowners policies. Typical umbrella policies require you to have homeowners and auto liability insurance equal to the amount of your deductible. It is a good idea to try and get your umbrella liability, homeowners, and automobile policies from the same company; there is usually a hefty premium discount. Additionally, you eliminate the potential nightmare of dealing with different insurance companies if something should happen, where each would likely try to shift payment responsibility to the others, leaving you with the headache of being caught in the middle.