Imagine that you are just a few years away from a well-deserved retirement. You have a sizeable retirement account, plus a house and car that are fully paid off. In total, his assets amount to just over a million dollars. In short, life is pretty good.
Then one day, you get into a car accident. Fortunately, you are not seriously injured, and the damage to your car is within the limits of your auto insurance coverage. Unfortunately, the other vehicle involved in the crash is full of executives from a large company, and their injuries and the damage to the car are much more severe.
A court rules that you are responsible for the accident and must pay for the damage to the other car, the executives’ medical bills, and their lost wages during the time they were unable to work after the accident. In total, he owes approximately one million dollars in damages. Your auto insurance policy only covers the first $250,000 of that, so you’re in charge of the remaining $750,000.This could be a complete disaster for you unless you have an umbrella insurance policy. This type of insurance takes over when your other policies are up against their coverage limits. In this case, an umbrella policy would cover the extra $750,000 in damages and even pay your legal bills, saving you from having your assets wiped out. Your retirement was wiped out by a single unfortunate accident.
How umbrella insurance works
Most types of insurance provide a specific type of coverage. For example, your auto insurance policy protects you in the event of a car accident. In contrast, a homeowner’s policy covers your home and the belongings in it against theft or damage. Instead, umbrella insurance is a single policy that covers most aspects of your financial life, much like an umbrella covers every part of your body in a storm. So whenever you go over the liability limits on one of your other insurance policies, your umbrella policy is there to pick up the extra costs.
Umbrella insurance is a type of liability insurance, which means its job is to protect you against lawsuits. With most car insurance policies, the maximum amount of liability coverage you can buy is $300,000 or $500,000 per accident. Still, damages in a lawsuit can quickly add up to millions of dollars. A blanket policy prevents a massive case from wiping out all your other assets. Additionally, a comprehensive policy protects you from being sued for damages that other policies don’t cover, such as an accident you cause at work or on vacation.
What covers the umbrella?
The types of damage covered by an umbrella policy include the following:
- Bodily Injury. An umbrella policy picks up the tab if you hurt someone in a car accident and the medical bills exceed your auto insurance limits. Similarly, if the electrician slips and falls down the stairs while leaving your home, the policy covers all medical bills beyond the limits of your owner’s policy. You are also covered for types of injuries that other insurance does not cover. For example, if your dog bites someone while he’s out for a walk, homeowners insurance doesn’t cover the damage, but general insurance does.
- Property Damage If your teen crashes the family car through a fence and into the side of your neighbor’s house, an umbrella insurance policy can pay for any damage beyond the limits of your auto insurance. The policy also covers damages not included in auto and homeowners’ policies. Whether your pet grabs a priceless painting at a neighbor’s house, or your child knocks over an antique glass vase, or you rent a boat for a vacation and accidentally crash it into a dock, an umbrella policy can take care of the damage.
- Other Types of Legal Damages. An umbrella insurance policy protects you if you are sued for libel or slander, words written or spoken causing injury to another person. It can also save you against lawsuits for false arrest, malicious prosecution, violation of privacy, and a variety of other civil charges.
- Legal Fees. A final benefit of blanket insurance is that it pays for your legal fees and court costs in a lawsuit. Lawyers are expensive, and the cost of a significant case could force you out of court, even if you know you are not really at fault. You know you can afford a reasonable attorney to protect your assets with a comprehensive policy.
What umbrella insurance does not cover
- Although umbrella insurance protects you against most types of lawsuits, there are certain types that many policies specifically exclude. For example, many umbrella policies do not cover negligence lawsuits.
- Workers’ Compensation Claims Against Employers
- Damage caused by a business or by any activity related to the business
- They are intentionally causing damage to any person or property.
Also, it is essential to note that umbrella insurance only protects you from being sued for damages 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 your health insurance doesn’t cover will come out of pocket. In that case, an umbrella insurance policy can’t help you.
What umbrella insurance costs?
General insurance policies are usually sold in $1 million in coverage units. The possible minor procedure is $1 million, the next smallest is $2 million, and coverage continues to increase 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 that an umbrella insurance policy costs “about $250 to $600 per year”. GEICO puts the price 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 a year. These numbers are just estimates, however. The actual cost varies depending on where you live and how good of 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 higher risk of being involved in a car accident.
- Your Hobbies If you have a boat, motorcycle, or any other type of particular vehicle, that increases the number of ways you can get into an accident.
- Your Pets Pets, especially dogs, can be responsible for both injuries and property damage. Owning a dog, especially a breed considered aggressive, will surely make your policy more expensive.
- Your driving record. If you have been involved in an accident in the last five years, you will likely pay a premium as a result. Also, if a driver in your household is under 25 years of age, even if his driving record is impeccable, that increases his risk and thus his premium.
- Earlier Lawsuits. If you have ever been involved in any type of lawsuit, civil or criminal, that suggests you are a person who is at risk of 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. Keep in mind that you can’t get a comprehensive policy unless you already have dollar liability coverage for your auto and homeowners insurance in many cases. For example, GEICO only writes umbrella insurance policies for customers 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 coverage. Personal liability on your homeowner’s insurance.
Who needs umbrella insurance?
Since the purpose of umbrella insurance is to protect your assets from a lawsuit, it only makes sense to purchase them if you have assets to protect them. Farmers Insurance recommends purchasing 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 slightly broader standard: They say that umbrella insurance is a good investment for anyone who has more assets than they have in auto and homeowners insurance liability coverage. 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 help. The other factor to consider is how likely you will be sued. For example, if you spend a lot of time on the road, you are more likely to be in a car accident, which means you are more likely to be injured. If you often have guests in your home, there is a higher risk that one of them will be disabled there. Having a pool, dog, or gun in your home increases the risk of accidents that could lead to a lawsuit.
If you think an umbrella insurance policy is for you, the next question is how much coverage you need. To find out, follow these steps:
- Calculate your net worth. Add up the value of all your assets: your home, cash in the bank, stocks and bonds, retirement accounts, and anything else of financial value, and subtract the value of your debts.
- Find out how much liability coverage you already have from your existing insurance policies. On your auto insurance policy, there are three separate numbers to consider: bodily injury per person and accident and property damage per accident. There is only one number in your homeowner’s insurance policy: personal liability per occurrence.
- Take the smallest number you found in step two and subtract it from the number you found in step one. The difference is the amount of money you have without protection. Getting an umbrella policy for at least this amount gives you complete protection.
For most people, a fundamental policy of $1 million is enough. However, Bankrate recommends increasing your coverage to “$1 million more than you think you’ll need.” You can’t go back and increase your range once you’re in the middle of a lawsuit, so it’s better to have too much too little.end word
Like an umbrella on a sunny day, an umbrella insurance policy is something you don’t expect to use. But, also like an umbrella, it is much better to have it and not need it than to need it and not have it. For just a few hundred dollars a year, you can ensure your assets aren’t drenched in unexpected demand, and you won’t have to liquidate precious assets, like your retirement fund or college savings fund, to save yourself the same outside.