Do You Need an Umbrella Insurance Policy?
Umbrella insurance can help protect you from the cost of damages that exceed your primary insurance
Chances are, you have homeowner’s or renter’s insurance, car insurance, health insurance, maybe a life insurance policy. Insurance is designed to provide protection against the risks of daily life, paying off claims when problems arise.
However, each of these policies has limits – the dollar amounts the insurer is obliged to pay in a worst-case scenario. If your homeowner’s coverage is $350,000, and it costs you $500,000 to replace your home after an unforeseen disaster, you’re on the hook for that extra $150,000. The insurer pays $350,000 according to the policy limits.
You may not have enough protection when bad things happen, especially if a lawsuit is involved. About 13 percent of personal injury liability awards and settlements are $1 million or more.1 One way to help lower risk can be to purchase an umbrella insurance policy – a safety net designed to protect the important people and things in your life.
What Is an Umbrella Insurance Policy?
Umbrella insurance coverage kicks in when you've reached the policy limits of your primary insurance coverage. An umbrella policy typically protects against legal judgments that can cost much more than you actually own, and covers your legal costs as well.
Let’s say you have a $300,000 personal liability limit on your car policy. You’re judged to be at fault in an accident, and the damages exceed your auto policy limits. That’s when an umbrella insurance policy comes into play. If you have a million dollar umbrella policy, in fact, you could have a total of $1,300,000 in liability coverage.
How Much Umbrella Insurance Should I Have?
The total amount of your insurance coverage – both primary and umbrella – should match the total assets you have at risk: your home, your car, your boat and all your other possessions.
Is Umbrella Insurance Expensive?
Generally speaking, no. In fact, umbrella coverage is relatively inexpensive risk protection because the insurer is the secondary insurer, and only makes payouts when the primary insurer reaches policy limits.
The price of an umbrella policy varies according to how much coverage you require. If you have $5 million in assets, and a $3 million umbrella policy, you may pay more than the family provider who takes out a $1 million umbrella policy just to be prudent.
The cost of the policy is also determined by things like a credit check, a risk analysis, and even property inspections. Even so, an umbrella policy can be a low-cost safety net that protects your valuable assets. An average cost of about $380 per year can provide $1 to $2 million of protection.1 If you want to be very cautious, consider a $3 or $5 million umbrella insurance policy.
Shopping for Umbrella Insurance
Insurers offer a long menu of umbrella policy options, so some comparison shopping may be in order. First, determine your risk. Add up the replacement costs of your physical assets – home, possessions, cars, boats, livestock – whatever has value.
Add to this figure the cost of a lawsuit associated with your personal or business activities. How much would it really cost to rebuild your home – your way? Could you afford to defend against a personal liability claim made against you after an automobile accident? (The assistance of a professional may be necessary to arrive at an accurate value for these scenarios). These two figures should provide an indication of just how much umbrella coverage you may require to protect what you've worked so hard to earn.
Because umbrella coverage comes with a variety of features, talk to an insurance professional. Be sure to ask him or her to perform a detailed risk analysis based on everything from your profession to your age and number of dependents. It should help you get the right amount of umbrella coverage at the lowest cost.
Some people may “let a smile be their umbrella,” but today, smart consumers should consider adding an umbrella insurance policy to help protect their assets.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC