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Umbrella Insurance – Something to Consider?

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You have made the investment in home-owner’s insurance and auto insurance to protect your house and car, but accidents occur where these standard policies do not cover all the damages. One of the most certain things in life is uncertainty. Umbrella insurance might be a helpful policy to have in the event that your current coverage has gaps.

What is umbrella insurance? Umbrella insurance is liability coverage that goes above and beyond what homeowner’s and auto insurance policies provide. Umbrella coverage typically has a higher claims limit with a broader range of coverage, including claims involving bodily injury, property damage, and claims of libel, slander, or defamation of character. If the policy owner is sued or found liable for damages, umbrella policies may pay not only the monetary damage costs, but also attorney fees and other court costs. Having such coverage can prevent another party from attempting to take assets if damages and legal costs exceed the limits of regular insurance policies.

How does it work? First, to be eligible to purchase umbrella insurance, your car or homeowner’s insurance carrier will typically require you to meet specific qualifications, such as having an auto policy with a certain level of liability coverage. Coverage requirements are due to the fact that these policies work in conjunction with each other. Even if you carry umbrella insurance, your car or home insurance is your first line of defense. Consider the following scenario: your auto insurance covers $500,000 of liability and you are found liable for $2 million as the result of a car accident. In this case, your auto policy covers the first $500,000 and your umbrella policy covers the remaining $1.5 million (assuming your policy covers the incident and that you purchased that much coverage). On the other hand, if you are liable for $250,000 due to an accident on your property and your homeowner’s insurance liability limit is $300,000, your umbrella policy will not be needed.

Umbrella insurance coverage can be crucial in cases of large liabilities. If, for example, you are found liable and do not have enough liability coverage on your primary policies to cover the judgment against you, assets or property that you own could be used towards paying the settlement. It is important to note that IRA assets of up to $1 million and employee retirement accounts, such as 401ks, are usually protected from creditors under federal laws even without umbrella coverage. As a result, retirement accounts will likely remain safe even if you are a part of a legal case.

How much coverage should you get? Typical umbrella policies start at $1 million in coverage and are sold in million-dollar increments. In general, one would want at least enough coverage to cover net worth. Calculate the value of all of the assets you have and subtract your debt to determine your net worth. If your net worth is higher than $1 million, not including protected retirement assets, consider bumping up your coverage accordingly.

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