Everything you should know before buying an Umbrella Insurance Policy.
Table of Contents
What is Umbrella Insurance?
Umbrella insurance is a type of personal liability insurance policy that helps you when you are held liable for a claim that is larger than your homeowners or auto insurance policy will cover. If you own a boat, umbrella insurance will help you pick up where your watercraft’s liability insurance leaves off.
What Does Umbrella Insurance Cover?
Besides picking up where your other policies leave off, umbrella insurance also provides further benefits by covering liability claims other policies may not. These claims include libel, slander and false imprisonment. In case you own a rental property, umbrella insurance will provide liability coverage beyond your renter’s policy coverage.
For example, if your dog runs out of the house and attacks a neighbour who was going for a walk and your neighbour decides to sue you to cover her medical bills, pain, suffering and lost wages, your homeowners insurance might not be able to cover these claims but under the umbrella insurance policy, you will be able to stay protected.
Umbrella insurance helps provide coverage for not only the policyholder but also other members of their family or household. This way, you can have peace of mind knowing your umbrella policy can cover the other party’s medical bills if your teenager is found liable for a major accident.
However, make sure you know what sort of coverage the umbrella policy is providing in order to have the coverage you need. It is important to read all the terms and conditions of the policy so there is no confusion whatsoever.
Moreover, even though your umbrella insurance provides coverage for claims that your homeowners and auto insurance cannot cover, this type of insurance does not need incidents to involve your property or vehicle. It covers all sorts of claims but to have an exact idea, it is recommended to check your coverage policy before purchasing it.
Under the umbrella insurance, you will also be covered worldwide. However, with the exception of homes and cars you own under other countries’ laws.
However, even though umbrella policies provide broad coverage unlike some insurance policies that only provide coverage for specifically named incidents, no insurance policy can cover everything. If they did, there would no longer be a need for more than one insurance policy. Here is a list of things your umbrella policy may not end up covering:
- Damage to your own property. You have to keep in mind that umbrella insurance is a liability insurance which means it will only cover you if you are held responsible for damage to someone else’s property and not your own. In order to protect your own property and possessions, you need to have enough homeowners insurance coverage.
- Damage caused by you or a covered family member on purpose. If you deliberately cause an injury on someone, umbrella insurance would not provide coverage for costs of the lawsuit or judgment. Neither would an homeowners insurance policy provide coverage for claims like such.
- Any liability incurred in business or professional activities. In order to cover these liabilities, you should have business liability insurance as an umbrella policy will not cover any business related incidents.
- Liability assumed under a contract you signed.
- Liability related to war or armed conflicts. There are no insurance policies that cover war-related damage. This is because the financial losses that come with war are too high for insurance companies to even attempt to cover.
How Much Umbrella Insurance Do I Need?
When deciding how much umbrella insurance you need, it is wise to keep in mind what your net worth is. This way, you can know what enough liability insurance would be in order to cover that amount.
One simple way to calculate how much umbrella coverage you need, you can add up the value of your assets. This will include the value of your property, savings and investment accounts. Then, you should determine how much liability insurance you are already getting from other insurance policies. Whatever difference you are getting is the amount of coverage you should get in an umbrella insurance policy.
If you are likely to earn much more, compared to now, in the near future, you should include that potential income.
Another factor to consider is potential lawsuits keeping in mind that 401(k)s and other such employer-sponsored retirement accounts are protected from most lawsuits under the federal Employee Retirement Income Security Act of 1974 (ERISA). It is possible that the IRA accounts and the equity you have in your home are often protected by state laws. This is why it is advised to check your local laws before you make a decision about how much umbrella insurance you need.
Umbrella insurance is typically sold by insurers in million-dollar increments. This means that the cheapest policy will provide $1 million in coverage whereas the next-cheapest policy offers $2 million in coverage. So no matter what you choose, you end up getting a decent amount.
Is Umbrella Insurance Worth It?
Many insurance companies stress upon the importance of umbrella policies by using a fear factor and convincing people that it will help them live in this lawsuit world where anyone can sue you for anything at all and leave you in financial ruin. And although there are plenty of personal liability horror stories where victims were awarded millions of dollars in judgements that individuals had to pay, how likely is it that you could be in the same situation? If it’s not likely then is umbrella insurance even worth it?
Even though it is recommended that you should buy umbrella insurance coverage that is the same amount as the difference in your total assets and the limits of your auto or homeowner’s liability. However, jury awards can easily end up exceeding insurance policy limits. After which the question arises, are you at risk of being sued? Since everyone is always at a risk of being sued at all times of their life, it would make sense for umbrella insurance to be purchased by everyone. And why not? It is only a small price that you have to pay for your own peace of mind.
Some people are also more likely to need an umbrella policy than others are. Especially if you engage in an activity that puts you in dangerous situations or have a job that is more at-risk. All of these factors will only make you a better candidate for an umbrella policy.
Factors in personal liability risk include owning property or renting it out, having a hot tub or trampoline, employing household staff, being a celebrity, and hosting large parties. You are also at risk if you have a teenage driver in the family or own a dog. Both of these factors can pose a risk. Your teenage kid could crash into someone else and like the example given above, your dog could viciously attack someone else. All these increase the likelihood of you being sued. And the more likely you are to be sued, the more reasons you should have to purchase umbrella insurance. Having an umbrella policy will let you sleep better at night, especially if you are risk-averse.
Since an umbrella insurance policy offers a high coverage limit, it is generally considered good value for the cost. However, it is possible that you may also end up paying more for your other insurance policies in order to increase the liability coverage just so you can meet the minimum limits required for umbrella insurance. However, since your umbrella insurance policy will also cover your hobbies and other activities, it does not seem like a bad investment. Especially when it can be fruitful enough to save you from the millions of dollars you might have to pay in case you are served a lawsuit. In light of that, umbrella insurance benefits do seem to outweigh the cons it might have.
Should you get Umbrella Insurance?
Now that we know how much does umbrella insurance cost and what it covers, our safest bet would be to purchase the policy. Since there is a very small price to pay for a big advantage including your own peace of mind.