Umbrella Insurance – Protect Yourself Now

Umbrella insurance is something that most people have heard of through television commercials but know very little about. With all the different types of insurance such as automobile, boat, motorcycle, homeowner’s, renter’s, etc., umbrella insurance is the one that is often forgotten. The purpose of this article is to inform you about the basics of umbrella insurance in a concise, easy to understand manner.

What is an umbrella insurance policy?

An umbrella policy is a specific type of insurance policy that individuals and households may obtain in order to cover themselves against any liability beyond what a primary insurance policy might cover.

For example, let’s say you cause a car accident and your car insurance liability limit is $100,000.00.  If the total damages are $750,000, you could be personally liable for the remaining $650,000.00. That means the injured persons could collect the $650,000.00 by garnishing your future wages, seizing your vehicles or rental homes, and collecting from your personal bank accounts. However, if you purchased a $1 million umbrella insurance policy prior to the car accident, your initial car insurance would pay $100,000.00 and your umbrella insurance policy would pay the additional $650,000.00. The umbrella policy is not limited to car crashes.  It can also be used in conjunction with boats, motorcycles, homes, and simply yourself. Many primary insurance policies contain provisions about where your insured objects are covered geographically and up to what amount specific, individual items are insured. With an umbrella policy, none of that really matters. The upper limit to a claim is the amount you open the policy for, the policy generally follows with you even if you’re traveling internationally.  Be sure to check the specific details of what your insurance company offers.

Who needs it?

Generally speaking, everyone. Society and culture have become increasingly litigious and it is extremely easy for someone to sue you for simply tripping on your sidewalk, slipping and falling into your pool, or getting bit by your dog.  When something like this happens, the biggest fear is having to pay more than your primary insurance policy may cover. This is when the umbrella policy kicks in.  If you have sizeable assets or if you will have a significant increase in income in the near future, you should seriously consider purchasing this coverage immediately.  After an accident, you will not be able to purchase umbrella insurance that will cover you.

How do I get one?

Umbrella policies are offered by many insurance companies. The easiest way to purchase one is to contact your current homeowners’ or auto insurance company and ask them if they offer one. This is by far the simplest way, since most umbrella insurance policies are piggybacked onto your primary homeowners or auto insurance. It should be noted that just because it is attached to your homeowners or auto insurance, does not mean that coverage is limited to that specific item.

Not only are the Umbrella policies written with the Home or Auto policies (piggybacked), but many companies will not write the Umbrella without the insured carrying these underlying policies. Also, each company will likely have different conditions about what they cover and exclude, so you should discuss your individual circumstances with your agent to decide which policy is best for you.

How much does it cost?

It is surprisingly cheap.  One million dollars of coverage ranges from approximately $150 to $200 annually. If you use a large insurance company that is able to spread out its own liability amongst numerous clients, additional coverage is generally cheaper than the first million dollars, approximately $120 dollars per million per year. It is when you get to the ten million dollar mark where the rate increases significantly. The reason is that there are very few people with coverage of ten million dollars or more so the insurance company’s risk is spread much thinner therefore giving you the higher premium.

With the amount of money most people pay for automobile insurance, as much as $4,000 to $5,000 annually in some markets for two drivers and two cars and an added $2,000 to $3,000 annually for homeowners insurance, an additional $200 for ONE MILLION DOLLARS of added coverage is quite insignificant. That’s about an additional 2.8% of your total premium for more than triple the coverage from any of your primary policies.

How much coverage do I need?

This is debatable. Most insurance companies offer a minimum coverage of one million dollars and then increase in various increments. One million dollars may sound like a lot of money, however let me give you an example. Let’s assume you get into a multi-vehicle accident and three of the injured passengers of the vehicles are unable to work for six months. Assuming a $100,000 salary per year per person, that’s $150,000 of unpaid compensation that you may be liable for. This expense is in addition to vehicle repair costs, hospital bills, and non-economic damages such as “pain and suffering”.  

Many insurance agents’ general practice is to obtain a policy that equals either ten times your gross household income or the sum of your assets. Most insurance companies will issue policies for one million dollars right over the phone without any questions. However, if you decide you need more coverage, then some companies have an application/review process which may entail providing the company with documentation detailing your assets and annual income.  Your financial advisor should be able to advise you on the amount of coverage you should carry.

Umbrella insurance is an important policy to protect your assets.  It is a relatively inexpensive way to have peace of mind if you cause damage or injury to someone else.  Please take a moment and speak with your insurance agent and learn more about umbrella insurance.  Remember, once you have already caused damage or injury, it’s too late.  Buy it now.


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