An umbrella insurance policy provides liability coverage over and above the coverage in your homeowner and auto insurance policies (hence, the term “umbrella”). The umbrella insurance policy provides extra protection in the event that a situation arises in which you are not fully covered by your normal insurance. The umbrella policy covers the gaps.
How does an umbrella insurance policy protect you?
Let’s assume you are sued for liability in an auto accident and after a lengthy lawsuit a judgment is declared against you for $750,000, but you only have $250,000 worth of liability coverage with your auto insurance policy. The rest of the judgment money would have to come out of your own pocket unless you have an umbrella policy to pick up the difference. Without the additional coverage, you could lose a portion or all of your assets, including your home, to pay off the judgment.
How much does an umbrella policy cost?
Umbrella policy costs are based on a number of factors, including the current insurance company you are using, the personal risk factors in your situation, and your credit score. Most umbrella policies are written over existing homeowners and auto policies and you may get the best price when you have all of your policies (auto, home, umbrella) with the same insurance company. The average cost is from $200-$400 for a $1 million policy.
Umbrella policies may carry a higher deductible than you’re used to seeing because they are meant to be used after all other insurance is exhausted. Your underlying auto and homeowners policies must have liability coverage in the amount of the umbrella insurance deductible amount. In our car accident example above, your umbrella policy may have a $250,000 deductible. If you received a $750,000 judgment against you, your auto policy would pay $250,000 first, and then the umbrella policy would pay the remaining $500,000.
Do I need to have umbrella insurance?
We live in a litigious society and accidents happen. One common idea is to have enough umbrella insurance to cover your assets. So if you have a $300,000 home and retirement assets of $700,000, you would want to have a $1 million umbrella policy. With a $1 million policy, you would be protecting your home and retirement.
It’s also a good idea to consider the risks of your particular situation. Do you or your children drive frequently? What is the risk of someone getting injured on your property? Are you self-employed and have clients coming to your home? Do you have pets?
Umbrella insurance is designed to protect you against life’s unforeseeable accidents and legal judgments against you. At Wisdom Wealth Strategies, we think a $200-$400 premium on a $1 million policy is a relatively small price to pay for the protection that it provides.