What is an Umbrella Insurance policy?
Contrary to popular belief, umbrella coverage isn’t just for the wealthy. In fact, umbrella coverage makes a lot of sense for almost everyone. It’s that extra layer of coverage that protects you from unexpected situations so you can protect your “rainy day” fund, retirement savings, and everything you’ve worked so hard for.
Umbrella Insurance coverage is good for incidents impacting you over and above the policies you already have. For example, if you’re involved in an auto accident and your liability exceeds your policy limits, having umbrella coverage can help pay the difference. These types of incidents can happen at any time to anyone. Be confident you have the right protection and have your agent review
your insurance liability policy limits with you to see if you could benefit from umbrella coverage.
As a general rule, you might hear you should purchase umbrella insurance if the total value of your assets, including ordinary checking and savings accounts, retirement and college savings and investment accounts, and home equity is greater than the limits of your auto or homeowner’s liability. The idea behind this advice is that you want to have enough liability insurance to fully cover your assets so you can’t lose them in a lawsuit.
This recommendation doesn’t quite make sense, though, because jury awards can easily exceed insurance policy limits. The real question you should ask yourself is, am I at risk of being sued? Everyone is, so in a sense, umbrella insurance makes sense for everyone. It’s a small price to pay for the extra peace of mind.
Having a teenage driver in the family also puts you at increased risk, as does owning a dog or owning a home with a swimming pool. Basically, the more likely you are to be sued, the more strongly you should consider purchasing umbrella insurance. But anyone who is risk adverse will sleep better at night knowing they’re protected by an umbrella policy.
An Example of How Umbrella Insurance Works
Let’s say your homeowner’s insurance has a personal liability limit of $500,000. You throw a large holiday party, and one of your guests slips and falls in your back yard while they were playing volleyball. She ends up with a concussion and some high medical bills and decides to sue you. In court, the jury sides with your party guest and awards her a judgment of $1 million. This judgment is $500,000 higher than your homeowner’s insurance liability limit.
Without an Umbrella Policy, you have to pay that $500,000 out of pocket. The money will have to come out of your retirement account, your main source of savings. The loss is devastating and means you’ll have to work 10 additional years, find a higher paying job, or drastically cut back your expenses to replenish your savings and get back on track to be able to retire.
But if you have $1 million in umbrella insurance, your umbrella policy will cover the portion of the judgment that your homeowner’s insurance doesn’t, and your retirement savings will remain intact. The umbrella policy will also cover any attorney fees and other expenses related to the lawsuit that weren’t covered by your homeowner’s policy. That coverage is in addition to the $1 million.
So if you have a $5,000 deductible on your homeowner’s insurance, you’ll pay that amount out-of-pocket. Then, your homeowner’s policy will pay the next $495,000, which gets you to the $500,000 policy limit. Your umbrella insurance doesn’t have a separate deductible in this case, because the homeowner’s policy covered part of the loss. Your umbrella policy pays the remaining $500,000 of the judgment plus legal expenses, so you’re only out-of-pocket $5,000 for the $1 million judgment.
Consider the following real life scenarios on the benefits of a personal umbrella policy.
Incident: The insured was driving on a highway when she was rear-ended by another driver, causing her car to hit a light pole. The other
driver was uninsured and attempted to flee the scene. The insured sustained serious injuries.
Outcome: The insured’s primary insurance company paid out the full uninsured motorist limit. Unfortunately, it still left the insured with $260,000 in medical expense. Thankfully, the Personal Umbrella Excess Uninsured Motorist coverage paid the remaining expenses of $260,000.
Incident: The insured was driving a vehicle when it was struck at high speed by an uninsured and intoxicated driver. The insured was airlifted from the accident scene to a hospital. He sustained spinal injuries and other complications as a result of the accident.
Outcome: Because the Personal Umbrella Policy included coverage for Excess Uninsured/Under insured Motorists with a policy limit of $1,000,000, the insured was paid the full $1,000,000 for an accident that was not his fault.
Incident: The insured was operating a ski boat on a lake with two passengers. As the insured turned the boat, a strong gust of wind blew an inner tube out of the boat. A rope connected to the inner tube caught one of the passengers around the leg, launching him out of the boat
and onto the dock. The passenger sustained substantial injuries to his knee and hip and was totally disabled for six weeks, leading to a business income loss.
Outcome: The primary insurance company tendered its full policy limit, which was $500,000 short of the total claim amount. The Personal Umbrella Policy covered the remaining amount. Without the personal umbrella policy, the insured would have had to pay the $500,000 out-of-pocket.
What Doesn’t Umbrella Insurance Cover?
Umbrella policies provide broad coverage , meaning they cover any incident that the policy does not specifically exclude. While no insurance policy covers everything, Umbrella insurance will cover the majority of accidental occurrences. But here are some things that an Umbrella Policy will NOT cover:
- Damage to your own property
- Damage you or a covered insured cause on purpose
- Liability incurred in business or professional pursuits
- Liability related to war
So do you need Umbrella coverage?
Even the most cautious person can end up on the losing end of a large judgement purely by accident. It is smart to protect yourself and your family from financial ruin. Having an Umbrella policy can help protect the assets you worked hard for.