You’re a few years away from a perfectly planned retirement. Your retirement account has you feeling secure, plus you have a car and a house that are fully paid off. Collectively, all your assets equal over a million dollars.

One day, out of the blue you get into a car accident.  Luckily, you’re not badly hurt, and the damage to your car is minimal so it is covered by your auto insurance. Surprisingly, the other vehicle involved in the crash is full of executives from a major company. Their injuries, and damages to the car, are more serious. A court decides you are responsible for the accident. You are ordered to pay for the damages to the other vehicle, and the executives’ medical bills. Also you are ordered to pay for lost wages and time because they were unable to work following the accident.

Crazy right, turns out you end up owing about a million dollars in damages. Your auto insurance policy only covers the first $250,000 of that. But you’re still liable for the remaining $750,000.

This would be a complete disaster for you or anyone else. Unless you have umbrella insurance. Umbrella insurance kicks in when your other policies reach their coverage limits. In this instance, an umbrella policy would cover the $750,000 in damages and even pay your legal bills. This would save you from having all of your retirement and assets wiped out by a single accident.

What is Umbrella Insurance?

Traditional types of insurance provide one specific kind of coverage. Auto insurance policy protect you in case of a car accident. Your homeowners policy covers your house, and the belongings in it, against theft or damage. Umbrella insurance is unique because a single policy can cover most aspects of your financial life. Kinda like an umbrella covers you in a rainstorm. Anytime you exceed the liability limits on  your insurance policies, your umbrella policy is there to cover the extra costs.

Umbrella insurance is considered to be a of liability insurance. This meaning that its purpose is to protect you from lawsuits. With a lot of auto insurance policies, the maximum amount of liability coverage you can buy is between $300,000 or $500,000 per accident. Damages in a lawsuit can easily add up to millions of dollars.

Having an umbrella policy stops a massive lawsuit from wiping out all your assets. Also your protected  against being sued for damages other policies don’t cover. Like an accident you caused at work or while on vacation.

Umbrella Insurance Coverages

Types of coverages found in an umbrella policy include:

  • Property Damage. Say your teenager crashes the family truck through a fence and into the side of your neighbor’s house. Umbrella insurance can pay for any damage beyond the limits of your auto insurance. The policy also covers damage that isn’t included in auto and homeowners policies. If your pet destroys a priceless painting in a neighbor’s house, or you rent a boat during a vacation and accidentally crash it into a pier, an umbrella policy will cover the damages.
  • Bodily Injury. If you injure someone in a car accident and the medical bills exceed the limits of your auto insurance, an umbrella policy picks covers it. Surprisingly, if a plumber trips and falls down the stairs  leaving your house, the umbrella policy covers any medical bills over the limits of your homeowners policy. Your coverage extends to all types of injuries that other insurance doesn’t cover. Example, if your dog bites someone while you’re out, homeowners insurance doesn’t cover that type of issue, but umbrella insurance does.
  • Other Kinds of Legal Damages. Umbrella insurance also protects you if you’re sued for libel or slander. That is  written or spoken words that cause injury to someone else. It can also protect you incases of false arrest, malicious prosecution, violation of privacy, and a variety of other civil charges.
  • Legal Fees. Umbrella insurance takes care of  legal fees and court costs in a lawsuit. Lawyers can be expensive. The cost of a major lawsuit could force you into settling out of court, even if your not  at fault. With an umbrella policy, you know you can afford a good lawyer to protect your assets.

 

What Umbrella Insurance Doesn’t Cover

Although umbrella insurance protects you against most types of lawsuits, there are certain kinds that many policies specifically exclude. For example, many umbrella policies do not cover:

  • Malpractice lawsuits
  • Workers compensation claims against employers
  • Damage caused by a business, or by any business-related activity
  • Damage that you cause intentionally to any person or property

Also, it’s important to note that umbrella insurance only protects you from being sued for damage to other people. If you’re the one who gets hurt and needs an expensive operation, it’s up to your health insurer to pay for it – and anything the health insurance doesn’t cover still comes out of your pocket. In that case, an umbrella insurance policy can’t help you.

What Umbrella Insurance Costs

Umbrella insurance policies are generally sold in units of $1 million in coverage. That is, the smallest possible policy is $1 million, the next smallest is $2 million, and coverage continues to climb in $1 million increments from there.

According to Bankrate, umbrella insurance is “the absolute best buy in the insurance business,” at around $150 or $200 per year for the first $1 million in coverage and another $100 for each additional million. However, the websites of actual insurance companies give slightly higher estimates of the cost: Farmers Insurance says an umbrella insurance policy costs “around $250 to $600 a year,” GEICO puts the cost at “less than $300 for $1 million of coverage,” and Liberty Mutual says a $1 million policy costs “about a dollar a day,” or $365 per year.

These figures are only estimates, however. The actual cost varies based on where you live and how good a risk the insurance company thinks you are.

Here are some factors that could affect the amount you pay:

  • Your Job. People in some lines of work are more likely to be in accidents that cause harm to others. For example, if your job involves a lot of driving, you have a greater risk of being involved in a car accident.
  • Your Hobbies. If you have a boat, a motorcycle, or any other kind of specialty vehicle, that increases the number of ways you could get into an accident.
  • Your Pets. Pets, especially dogs, can be responsible for both injuries and property damage. Having a dog, especially a breed that’s considered aggressive, is sure to make your policy more costly.
  • Your Driving Record. If you’ve been involved in an accident within the past five years, you’re likely to pay a premium as a result. Also, if any driver in your household is under the age of 25 – even if their driving record is faultless – that increases your risk, and therefore your premium.
  • Previous Lawsuits. If you’ve ever been involved in any kind of lawsuit – civil or criminal – that suggests that you are a person who’s at risk for being sued, your policy is likely to be more expensive than someone without a similar history.

The best way to get an accurate price on an umbrella insurance policy is to contact the insurance company directly. Many companies can give you a quote over the phone or by email.

Note that in many cases, you can’t get an umbrella policy unless you already have high-dollar liability coverage on your auto and homeowners insurance. For instance, GEICO only writes umbrella insurance policies for customers who are covered for at least $300,000 of bodily injury and $100,000 of property damage on their auto insurance, plus at least $300,000 in personal liability coverage on their homeowners insurance.

 

Who Needs Umbrella Insurance

Since the whole point of umbrella insurance is to protect your assets from a lawsuit, it only makes sense to buy it if you have assets to protect. Farmers Insurance recommends buying an umbrella insurance policy if your net worth is at least $1 million – the minimum amount covered by most umbrella policies. Other insurers use a somewhat broader standard: They say umbrella insurance is a good investment for anyone who has more in assets than they have in liability coverage from auto and homeowners insurance. For example, if you have $700,000 in assets and your auto insurance only covers you for $300,000 per accident, an umbrella insurance policy protects the rest of your assets.

Other factors to consider are the odds you can be be sued. Spending a lot of time on the road, makes you more likely to be in an auto accident.  This makes the risk higher that you may to be sued. If you often have guests in your home, there’s a greater risk that one of them will be injured.

Thinking umbrella insurance is for you? The next question to ask is how much coverage do you need.

To find out, follow these steps:

  1. Calculate your net worth. Add up the value of all your assets  (your house, bank accounts, stocks and bonds, retirement accounts, and anything else of financial value). Subtract the value of your debts.
  2. Determine how much liability coverage you have from your existing insurance policies. On your auto insurance policy, there are three separate numbers to look at: bodily damage per person and per accident, and property damage per accident. On your homeowners insurance policy, there’s just one number: personal liability per occurrence.
  3. Use the smallest of the numbers found in step two and subtract it from the number you found in step one. The difference in the two number is the amount of money you have that’s unprotected. Getting an umbrella policy for at least this amount gives you full protection.

For most people, a basic policy of $1 million is enough.  Bankrate recommends raising up your coverage to “$1 million more than you think you will need.” You can’t go back and increase your coverage once you’re in the middle of a lawsuit, so it’s better to have more than too little.

 

Infinder Thoughts

Like an umbrella on a sunny day, an umbrella insurance policy is something you don’t expect to use. But,  like an umbrella, it’s much better to have it and not need it. For a few hundred dollars a year, you can guarantee your assets won’t be affected by a unexpected lawsuit. Also you won’t have to liquidate your retirement fund or a college savings fund.

 

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