Umbrella Insurance?
Consider Umbrella Insurance – sometimes referred to as personal liability insurance – to protect your savings and other assets. If you are sued for damages that exceed the limits of your auto insurance, home insurance, or other policies, a general policy will help pay off your debt.
Note that Umbrella Insurance is similar but not identical to liability insurance, which gives you a higher limit on existing liability coverage. What is the difference? Most Umbrella policies also offer additional coverage that is not included in your main insurance policy. For example, it can pay attorneys’ fees and damages if you are accused of defamation (false oral testimony) or slander (false written testimony).
1- How Umbrella Insurance works?
To get a better idea of how umbrella liability insurance can be useful, consider these scenarios:
You ran a red light and damaged another car. There was significant damage to the car and several people were injured. The car required $25,000 for repairs and injuries totaling $275,000. Additionally, the driver of another car was a dentist who had been unable to work for months due to a broken arm. He sues you for $200,000 in lost profits.
You’re on the rocks with a total of $500,000. If you only have $300,000 of your auto insurance coverage, the remaining $200,000 will have to come out of your pocket.
If you have general insurance, it will pay the difference between what your primary insurance covers and what you still owe. Umbrella Policy will also cover your legal costs in that case.
2- What does Umbrella Insurance cover?
Umbrella Insurance protects you and members of your household from claims relating to personal injury to others, damage to other people’s property and various claims such as defamation, owner’s liability and imprisonment, depending on your policy.
In addition to paying damages up to the limit of your liability, your general insurance will usually cover the associated legal fees on top of that amount. Let’s say you have a general policy with $1 million in liability insurance and you are sued for the full amount. Your insurance company will pay the $1 million and provide your legal defense or cover your expenses.
You may have to pay a “withholding limit,” which is similar to a deduction. This is the amount you have to cover before your policy starts paying.
Details and exceptions can vary widely by general policy, but here are some examples of scenarios that are commonly covered:
- Your teenage son was involved in a car accident and the costs for injuring another driver exceed the limits of your auto insurance liability.
- A guest falls down your stairs and sues you for their medical bills plus damages and exceeding your homeowner’s liability insurance limit.
- A restaurant sues you for writing a negative review online.
3- What Umbrella Insurance doesn’t cover:
Umbrella insurance doesn’t cover injury or damage to your own property – you’ll need another type of coverage for that (eg health insurance or collision protection with your auto insurance). It also doesn’t cover liabilities related to your business unless you have a general business policy instead of a personal policy.
Most general insurance policies do not cover liability for breach of contract by you. For example, if you sue a roofing contractor for not paying for work they signed off on, your general insurance policy probably won’t help. And if you intentionally hurt someone or commit a crime, you are almost certainly not protected.
Ships are another common exclusion area. Some companies only cover certain sizes or types of vessels. Others don’t cover it at all unless you have boat insurance.
4- Do you need an Umbrella Insurance policy?
There’s no law that requires you to have umbrella insurance. But if you have a lot of assets or a high probability of being sued, you may want a blanket policy. It may be worth taking out umbrella insurance if:
- You own property.
- You have significant savings or different resources.
- They are concerned about liability claims against you when traveling outside the United States.
- Do you own any items that could cause a lawsuit for injury, such as a swimming pool, trampoline, gun or dog. Check with your insurance company to see if they cover your dog’s breed.
- You are the landlord.
- Do you have an inexperienced driver at your home?
- Often have parties at your house.
- Serves on the board of directors of a non-profit association.
- Post product and business reviews regularly.
- Participating in sports where you can easily injure others for example, hunting, skiing or surfing.
- You are a public figure.
5- How much Umbrella Insurance do you need?
It is advisable to take out at least sufficient liability insurance to cover your assets. To decide how much insurance coverage you need, add up the values of your real estate, savings, and investment accounts. Then look at the liability insurance you already have through your existing policies and get enough general insurance to cover the difference.
You may also want to include potential income if you are likely to earn more in the future than you do now — for example, if you’re a medical student.
As you consider potential lawsuits, remember that employer-sponsored retirement accounts like 401(k)s are protected from most lawsuits under the Federal Employees Retirement Income Security Act of 1974.
IRAs don’t, except for funds transferred from employer-sponsored accounts.
However, state laws can provide protection for your IRA account and the equity you have in your home. Check local laws before deciding how much umbrella insurance you need.
Insurers usually sell umbrella insurance in multi-million dollar increments. That means the cheapest policy available will offer $1 million in coverage, the next cheapest policy will have $2 million in coverage, and so on, so whatever your choice, you’re getting a reasonable amount.
6- How much does Umbrella Insurance cost?
Umbrella insurance is actually not too expensive. A $1 million umbrella policy only costs around $150-$300 per year. And if you want to increase your coverage to $2 million, you only need to pay an additional $75 per year.
In fact, for every additional $1 million in coverage, you only pay an additional $50 per year on average. It’s so cheap you might even pay more for an actual umbrella!