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.
As with most insurance policies, you hate to spend money on the premiums for years and years while never making a claim, but you are so incredibly thankful if you do ever have to count on making a claim. It could mean the difference between being financially unaffected and bankruptcy.
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. Umbrella insurance provides broad insurance beyond traditional home and auto. It provides additional liability coverage above the limits of homeowners, auto, and boat insurance policies. It can also provide coverage for claims that may be excluded by the primary policies. These may include, but are not limited to: false arrest, slander, libel, and invasion of privacy.
How Umbrella Insurance 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 another $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 Umbrella Insurance 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 little more than what you spend on a few utility bills. Sure, you may never need it, but if you ever do, you’ll wish you had it.
Where to Get Umbrella Insurance
You usually never have to go beyond 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 Liberty Mutual for my auto insurance, and they also offer an umbrella policy. The last time I got a quote for coverage through them they 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 coverage equal to 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 from lawsuits 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.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
The first step if you don't have an umbrella is to max out the liability insurance on your primary home and auto insurance. Most carriers can go up to $500,000 and some can even do $1,000,000 on a standard policy.
I have heard, in the event your house burns down - typically the homeowners insurance will pay out your house value, but that generally does not cover enough to rebuild the house. Apparently the cost of cleaning up the property & hauling everything away can eat up most of the amount paid out by your homeowners insurance.
Would an umbrella policy help in this case?
For example, my homeowners policy will cover the 250k. If the cost of hauling away is 100k, I'd only be left with 150 to rebuild - which I know is atleast 100k too low in this area. On top of that, I still have 290k owed on the mortgage. (I've questioned the discrepancy between my home value vs replacement cost, and there's a considerable difference, but the answer has been the same, the land has value but does not need to be replaced). Would an umbrella policy help bridge the gap - to rebuild atleast (not the outstanding mortgage) ?
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every time I read about insurance I get a sick feeling in my gut. I know I need more of it, but hate paying for it. Life insurance is the one that I don't have and probably should.
Another insurance policy to think about. However, what you wrote make sense. It is just that with so many things that you need to take care of, this is an additional cost that may well affect monthly budget. Although, you are quite right getting it from the same insurance provider will generate discounts. Thanks for this valuable information. Cheers!
wow. I never heard about that. Thanks for sharing!
A bumbershoot can be a much less expensive route to protect you if you have rental property.Holding a property in an LLC in California will cost $800 ever year to the taxman - just to have the LLC. You'll also have to pay your accountant a few hundred bucks to do the taxes for that LLC.My umbrella from a well-known insurance company also covers a rental which is insured by a smaller company. I just had to make sure the smaller company's minimum coverages where what the well-known company required for my umbrella.
@POR Oh, and I just wanted to also add to my other comment that most good policies will include some debris removal under Coverage A, but the limits are generally quite low. But it's at least worth checking to see how much is covered before opting for additional coverage.
@POR An umbrella policy is for liability, not the replacement of damaged property. It is true that standard homeowners coverage will cover the replacement value of the structure, but not specifically things like debris removal. You can add this coverage with your insurer, so if this is a concern for your situation I'd check with them to see how much it would cost. I suppose it might be possible for an umbrella policy to cover something like this, but I'm only aware of the liability protection so you may want to ask your insurer about that as well.