How an Umbrella Policy Can Save You from Ruin

Do you have enough liability insurance? If there were a vehicle accident for which you were at fault, and a family breadwinner were disabled or killed, would your auto liability policy offer enough coverage to pay for a lifetime of lost wages due to such an event? Keep in mind, the legal system holds you accountable for injuries you cause to others.

This may include garnishing your wages and seizing any assets you have in order to pay off a legal judgment. Consider what would happen if there were a settlement (or judgment, if it went to court) of $2.5 million as a result of an auto accident for which you were found liable and your auto policy has a limit of $500,000. After the insurer pays the judgment of $500,00 you would be on the hook for the remaining $2 million.

The umbrella protects

To avoid this fate, all you need is an umbrella insurance policy. These policies provide additional coverage once the liability limits on your homeowner’s or auto insurance policy are exhausted. Umbrella policies are typically sold with limits of $1 million to $10 million. In the example above, if you had a $3 million umbrella policy, the auto insurer would pay the auto policy limit of $500,000, and your umbrella insurance would pay the other $2 million of the $2.5 million settlement or award. Your assets would not be at risk.

When considering umbrella coverage, you should ask yourself whether you have assets that you don’t want to put at risk in the event of a catastrophic liability. An umbrella policy is not limited to covering liability incidents that occur in your car. Do you have a swimming pool, trampoline, swing set, or other recreational equipment? Also if one of your kids injures someone and you are sued, excess liability would be covered by the policy too. Most umbrella policies can also save the day if you accidentally posted something on your social media that results in legal action. This is because most of these policies include a “Personal Injury” clause, which covers things like libel and slander.

How much do you need?

People often figure that the amount of umbrella coverage they need should be the value of their assets, but this might not be adequate. If, for example, you have assets of $2 million and buy $2 million worth of coverage, what happens if you’re found liable for a $4 million judgment? Insurance would pay the first $2 million, plus the limit of the underlying homeowner’s or auto policy, but you could lose a significant amount of your assets because of the shortfall in coverage. The more coverage you get, the more bulletproof your assets become.

Costs

The cost of an umbrella policy is relatively inexpensive. The rate will depend on how many cars you have, if you own rental properties and whether you have younger drivers under the age of 21, which will slightly increase the rate. In most cases, you can get a $2 million umbrella policy for about a dollar a day if you have the basics, such as two cars and a home. Even though these policies are inexpensive, securing an umbrella to protect you should never be done based on cost – it should be based on what is the best amount of coverage to help prevent any loss of assets. The key is to preserve your quality of life. Call us if you need assistance assessing how much you require to protect your assets and quality of life.