Protect Yourself from Catastrophic Loss With the Often Overlooked Umbrella Policy

By Jeremy on Jun 16, 2008 with Comments 7

What happens when you are sued for more than your basic homeowners or auto insurance policy covers and are found liable? Well, for most people, it would mean liquidating unprotected assets in order to satisfy the judgment. This may mean garnished wages, selling property, and possibly losing some of your investments. This is certainly a situation that could ruin your life, but there are ways to protect yourself.

What is an Umbrella Policy?

A personal umbrella policy is additional coverage that goes above and beyond what your homeowners and auto insurance policies cover. Think of it as a protective umbrella that will pick up the damages once you have exhausted your coverage of those policies.

Here’s How it Works

Let’s say that you’re having a 4th of July cookout with some neighbors, and one of your neighbors suffers a major injury while in your home. You don’t think much of it because you know that your homeowners policy covers liability up to $100,000. But to your surprise, the neighbor is suing for $1 million in damages. How on Earth will you ever be able to come up with $900,000?

If you don’t have an umbrella policy, you could find yourself in a very ugly situation. But let’s say you had the foresight to purchase a $1 million umbrella policy. Guess what, you’re in luck. Your homeowners policy would pick up the initial $100,000, and the remainder would fall under your umbrella. This could save you from losing almost everything you’ve worked your whole life for.

It is also important to realize that this type of policy works for auto accident claims as well. We all know how dangerous the roads are, and most people only have a few hundred thousand in liability coverage through their auto policy. Just a seemingly small accident can do a great deal of damage to the occupants of another vehicle that leads to a potential significant lawsuit. Are you willing to share the road with all those crazy sue-happy drivers with only $200,000 in liability protection?

How Much Does It Cost?

Most people just assume that since the coverage amounts are typically in the millions that it would simply be too expensive to purchase. This is generally not the case. In many instances you can obtain $1 million in coverage for just $200-$300 per year. Think about that–the annual cost of a million dollars of coverage is probably less than half of what you spend annually on your cable or cell phone bill. Sure, you may never need it, but if you ever do, you’ll wish you had it.

Where to Get It

You usually never have to go past your own current insurance provider. The first place to check is with your homeowners insurance provider and see what they offer. Even if you don’t own a home, or want to look for other options, I’d check with your auto insurance provider. I use Progressive for my auto insurance, and they also offer an umbrella policy. I don’t have one through them, but when I looked last year, it had an annual premium of $250 for $1 million in coverage. You can also look for coverage elsewhere, so there is nothing stopping you from shopping around. But keep in mind that having multiple policies with one carrier may provide additional discounts.

How Much Coverage?

This answer will be different for everyone, and due to variances in state laws regarding what assets may not be subject to seizure, it is impossible to say that you should have a specific amount of coverage. This is where it pays to speak to an attorney. Even so, there is a general rule of thumb that suggests that you should have enough protection to equal your net worth, rounded to the next million. So, if your net worth is approximately $600,000, you should err on the side of caution and have a million in coverage. Granted, some assets may be protected in your situation or state, but given how inexpensive the premiums are relative to the coverage, it is better to be slightly over insured in this instance.