You may have never heard the term “umbrella insurance,” but these broadly-based insurance policies offer protection that simply isn’t available from standard car or home insurance policies. Umbrella policies are add-ons that kick in from lawsuit-based actions once you’ve exhausted the limits of an auto or homeowners insurance policy, and they offer $1 million or more in total coverage.
Many consumers carry state-minimum liability coverage on both their auto and homeowners policies, which normally range from $15,000 to $100,000. If you exhaust these limits, you’re potentially looking at having to pay out of pocket for claims. In a worse case scenario, a court could order your assets – including your home – seized and sold to pay for a judgement rendered against you.
Umbrella policies are especially useful if you’ve accumulated a large amount of personal savings or wealth, or if you’re a small business owner. They offer coverage in situations that include:
- Claims or judgements exceeding your homeowners or car insurance
- Damages and bites caused by pets such as dogs or cats
- Injuries that occur on your property
- Defamation, libel or slander damages and judgements
Umbrella policies don’t cover everything, though. Here are some examples of where an umbrella policy wouldn’t pay:
- Any illegal activities, such as driving under the influence and being in a wreck
- Any high-risk actions you do intentionally, such as drag racing
- Causing intentional harm to others or their property
- Work-related actions. If it involves a business, you’ll need a separate policy, as umbrella coverage is only for individuals
One of the best things about umbrella policies is that they’re usually available at a very low cost. While policies and premiums available vary from state to state, a $1 million umbrella policy normally has an average cost of around $1 per day.
Because these policies are so inexpensive, they’re a smart investment, no matter how large or small your personal wealth is. Keep in mind that anyone can be sued, and a single crash involving injury or death can quickly exceed the limits of an auto policy, especially if there is a wrongful death lawsuit involved. Even if you have no assets to protect, a judgement from such a lawsuit can leave you paying for the rest of your life through wage garnishments.
Despite their low cost, sometimes it isn’t just as simple as purchasing an umbrella policy. For example, if you’re a Geico customer, you’ll be expected to carry an auto policy with minimum coverage of $100,000 for property damage, and $300,000 in bodily injury coverage. You’ll also need a homeowners policy with $300,000 in liability coverage. Since these exceed state required limits, you’ll likely be paying more for other policies, despite the low cost of an umbrella policy.
Some insurers require that you bundle all of your policies with them before they’ll sell you an umbrella policy. That means you’ll have to have auto, homeowners and umbrella coverage from a single company. However, some companies will underwrite umbrella coverage without you being a customer with your other policies.
We’d suggest that the higher your net wealth, the more likely you are to need the coverage afforded by an umbrella policy. And if you do any of the following, these policies should be considered a must:
- You have a net wealth of more than $1 million. You should have enough coverage to protect your assets in full.
- You’re not afraid to show your wealth. If you drive a Ferrari or other exotic car, you’ll be considered a potential target.
- You own your own business. Because your ownership in a business can be considered an asset, they too could be seized in a judgement.
- You have extra risk factors in play. Do you own a pool, a trampoline or other high-risk activity that you allow others to use? If so, personal injury lawsuits are possible.
Just as we recommend a review of your car insurance policy every year at a minimum, we also recommend you consider your complete insurance needs as well. If you’ve experienced life changes, such as increased wealth from inheritance or other means, we highly recommend you consider the addition of an umbrella policy as well.