Umbrella policies plug holes in your coverage
Let's start by dispensing with many of the myths surrounding
umbrella liability coverage.
· It's just for the rich.
· It's too complicated to coordinate it with
your existing insurance like your homeowner's policy.
· The premiums are too expensive.
All of these myths are incorrect. Umbrella liability
is relatively affordable, can be easily coordinated
with your existing insurance policies and by no means
is it just for the well-to-do.
Umbrella liability insurance is so named because it
acts like an umbrella, sitting on top of your auto and
homeowner's liability policies to provide extra protection.
(Even if you don't own a home, remember that you still
need renter's insurance to cover both your liability
and your personal property). Some examples of where
umbrella coverage often comes into play:
· An auto accident in which you're sued under
your auto insurance policy.
· Your neighbor slips and falls on your property,
and you're sued under your homeowner's insurance.
· A natural disaster in which another person's
property is damaged by, say, a tree on your property
crashing down on their vehicle or home. This usually
falls into the, "I thought that was covered by
my homeowner's policy" category.
Your auto and homeowner's policies have at least some
liability insurance that would be used to settle legal
claims. But what if a settlement (or judgment, if it
goes to court) is $800,000 and you only have $300,000
of liability insurance? The insurer would pay its $300,000,
but where are you going to get the other $500,000? Virtually
everything you own would be fair game to pay off the
debt. The only good news is that some states protect
certain assets (like your home) from seizure.
Worried? You should be. With America's love affair
with lawsuits, you can't afford to not have umbrella
liability insurance.
Umbrella liability insurance pays $1 million, $2 million
and sometimes even $5 million or more of a claim, on
top of what your basic policies will pay. You're usually
able to set the amount. For the protection you get,
umbrella liability coverage is not very expensive. Premiums
are usually $200 to $300 a year for $1 million worth
of coverage. The cost depends on such criteria as the
amount of coverage, the insurance company issuing the
policy and your own "personal risk factors"
(such as the number of traffic tickets you've gotten
in the past few years, and possibly your credit report).
When people do buy, they often don't buy enough. For
example, you may have assets worth $1 million, figure
that you need enough coverage to protect your assets,
and therefore buy a $1 million policy. But what if a
judgment of $2 million is handed down? We often hear
of juries awarding $20 million; it should be obvious
that the amount of someone's assets isn't taken into
consideration. In either of these cases, you would lose
all of your assets and still owe money. Your future
income, if you have to make settlement payments over
time, could easily be jeopardized. The same goes for
any inheritance you may receive (it could easily be
seized for payment), not to mention any inheritance
you may want to leave your children.
How much you own is irrelevant when deciding how much
to purchase. Do you live in a wealthy town, where you
could be an easy target for a big settlement? Do you
travel a lot? Do you entertain a lot? Do you operate
a home-based business and have employees or clients
coming to your home on a regular basis? (Many self-employed
people wrongly assume that this is covered in their
homeowner's policy.) If you answered yes to any of these
questions, it is particularly important for you to have
umbrella liability insurance.
Umbrella liability insurance usually carries a high
deductible of $300,000 or more. It's designed not to
kick in until your other policies are tapped out. The
illustration below shows how umbrella insurance is coordinated
with your auto and homeowner's policies. Typical umbrella
policies require you to have homeowner's and auto liability
insurance equal to the amount of your deductible. It's
a good idea to try and get your umbrella liability,
homeowners, and automobile policies from the same company;
there's usually a substantial premium discount. Additionally,
you eliminate the potential nightmare of dealing with
different insurance companies if something should happen,
where each would likely try to shift payment responsibility
to the others, leaving you caught in the middle.
It's depressing to think of all the liability risks
you take, any of which can instantly decimate even the
best financial planning strategy. Keep in mind that
it's fine to take calculated risks - for example, if
you don't drive your car every day and you infrequently
have people on your property, you may decide that instead
of spending money on umbrella premiums you'd rather
take the risk that you will never be hit with a liability
lawsuit. This strategy is called "self insurance."
(In fact, you're automatically self-insured if you don't
have any insurance coverage.)
Umbrella coverage, if nothing else, offers psychological
comfort. You'll know that if your neighbor falls on
your front steps or you rear-end the car in front of
you that you're protected.
