Umbrella insurance is something that most people have heard of, likely through television commercials, but know very little about. With all the different types of insurance that people own, automobile, boat, motorcycle, homeowner’s, renter’s, etc., umbrella insurance is the one that gets forgotten. The purpose of this article is to inform people about the basics of umbrella insurance in a concise, easy to understand manner.
1. 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 that of a primary insurance policy you may hold. For example, if you get into a car accident and the damages are $750,000 but your car insurance policy only covers up to $500,000, the remaining $250,000 would be claimed from your umbrella insurance policy.
The umbrella policy is not limited to automobiles, but also includes 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 up to. 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.
2. 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, getting bit by your dog, etc., and being awarded a large sum of money. 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.
3. How do I get one?
Umbrella policies are offered by many insurance companies. Some of the larger companies include Geico, Travelers, State Farm, Progressive, etc. The easiest way to get 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.
4. How much does it cost?
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 and additional $200 for ONE MILLION DOLLARS of added coverage is quite insignificant. That’s about an additional 2.8 percent of your total premium for more than triple the coverage from any of your primary policies.
5. 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 “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.
6. Do I need the higher homeowners or automobile insurance coverage if I have an umbrella policy?
Technically, no. You can reduce your auto insurance or homeowner’s insurance policy coverage if you obtain an umbrella insurance policy since you now have that “added coverage”. However, if you do lower the coverage of the individual primary policies, your total coverage will decrease. Let me give you an example. Let’s say you have $100,000 of liability coverage from your automobile insurance policy and then you open a $1,000,00 umbrella policy. You now have total coverage of $1,100,000 if you were to make a claim involving your vehicle. In scenario two, lets say you still open the $1,000,000 umbrella policy but decrease your primary auto insurance liability from $100,000 to the state minimum of $50,000. Your total liability coverage for an automobile claim is now $1,050,000 instead of the $1,100,000. The $50,000 may seem negligible but if you do need to make a claim then it might not. Usually the added $50,000 in coverage is only an extra ten or $20 per year, so it might be worth it to just keep it.
You often do not need to carry the maximum amount of insurance a company offers, but you usually can not lower your limits below a company’s requirement. For example, Travelers offers limits as high as $500,000 per occurrence for automobile insurance. Automobile insurance is the underlying line of business that they require you to carry with them in order to purchase the Umbrella. They will allow an insured to lower their coverage limits to $250,000 per person, $500,000 per occurrence, $100,000 property damage liability but you can not lower your limits any lower than that. Even though Allstate offers a maximum coverage of $500,000/$500,000 they allow their customers to purchase the Umbrella coverage with as little as $100,000/$300,000 automobile liability.
Contact your insurance agent today to talk more about obtaining an umbrella insurance plan. It will help make your life a lot less stressful to know you’re covered.