Why You Need an Umbrella Policy

February 9, 2016

Do you have enough liability insurance?  If there were a vehicle accident for which you were at fault, and a family breadwinner were disabled, would your auto liability policy offer enough coverage to pay for a lifetime of lost wages should it result in disability?  Keep in mind, the legal system holds you accountable for injuries you cause to others. This may include garnishing your wages and seizing any assets you have to pay-off a legal judgment. We'd all like to believe that such events will not have any financial impact on our lives, but if you are medium to high income earner or own a home, it can financially ruin you and can further result in a huge setback in your standard of living.   

Consider what would happen if there were a settlement (or judgment, if it goes to court) of $2,500,000 as a result of an auto accident for which you were liable.  Let's say you have insurance with a limit of $300,000 per accident.  What would happen?  The auto insurer would pay its $500,000.  Then virtually everything you own would be fair game for seizure to pay off the additional $2,000,000.  Furthermore, your earnings could be garnished for years to come.   With stakes this high, and considering the relatively modest cost of additional liability coverage, it just makes sense to purchase the added protection of an umbrella policy. 

An umbrella policy is insurance that provides additional coverage once the liability limits on your homeowner's or auto insurance policy are exhausted.  Umbrella policies are typically sold with limits of $1 million to $10 million.  In the example above, if you had a $3 million umbrella policy, the auto insurer would pay the auto policy limit of $500,000, and your umbrella insurance would pay the other $2,000,000 of the $2,500,000 settlement or verdict.  Your assets would not be at risk.

One myth about an umbrella policy is that it's only needed by the wealthy.  These days the cumulative value of homes, vacation homes, rental property, cars, boats, savings, investments, and so on, owned by many people, who don't consider themselves wealthy, make them vulnerable to liability beyond their auto or homeowner's insurance limits.  A good question to ask yourself is whether you have assets that you don't want to put at risk in the event of a catastrophic liability.   

An umbrella policy is not limited to covering liability incidents that occur in your car.  Do you have a swimming pool, trampoline, swing set, or other recreational equipment that can lead to accidents? If someone drowned in your pool and you had $500,000 of liability under your homeowners policy, chances are that the surviving family members will not settle for such a small amount. Your umbrella will pick up coverage after that. Most Umbrella policies can save the day if you accidentally posted something on your social media that results in a legal action. This is because most of these policies include a "Personal Injury" clause which covers things like libel and slander.

How Much Do You Need?
People often reason that the amount of umbrella coverage they need should be the value of their assets, but this might not be adequate.  If, for example, you have assets of $2 million and buy $2 million of coverage, what happens if you're found liable for a $4 million judgment?  Insurance would pay the first $2 million, plus the limit of the underlying homeowner's or auto policy, but you could lose a significant amount of your assets because of the shortfall in coverage. The more coverage you get, the more bullet proof your assets become. This is an item of discussion you should have with your insurance agent.

The cost of an umbrella policy is relatively inexpensive. The rate will depend on how many cars you have, if you have rental properties, and younger drivers under the age of 21, which will slightly increase the rate. In most cases you can get a 2 million dollar umbrella for about a dollar a day if you have the basics, such as two cars and a home. However even though these policies are inexpensive, securing an umbrella to protect you should never be done based on cost. Instead it should be done based on what is the best amount of coverage to help prevent any loss of assets. They key is to preserve your quality of life.


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