Imagine you’re tooling down the highway during rush hour, and suddenly your tire explodes. You manage to keep your car mostly under control, but you bump a tractor trailer in the adjacent lane, who then hits two cars next to it, and then overcorrects into the jersey wall.
Imagine you’re throwing a 4th of July picnic with some friends at your neighborhood park, and someone helpfully brings sparklers to entertain the kids. In the running around, one child gets jabbed in the eye.
Your 10th grader decides that his history teacher is terrible, and starts saying things about the teacher on social media.
I think my blood pressure is going up just writing these, but they’re all very real scenarios that can happen in regular life. In each of these situations, you could find yourself subject to an expensive lawsuit claiming that you are responsible for the damages. Are you covered for these thing?
If you’ve gotten at all into the world of personal finance, you’ve probably heard someone say something about umbrella insurance. If you’re at all like me, you file it under the “things I will look into someday” department and then promptly forget. Well, today is the day you’re going to look into it!
What Is Umbrella Insurance?
Umbrella insurance, sometimes called excess liability insurance, is liability insurance the covers you if you are found liable (responsible) for damages that exceed the coverage of your regular insurance policies. Umbrella policies usually work with homeowners/renters insurance and auto insurance, but may also work with insurances like boat insurance. Umbrella insurance may also provide coverage for certain things that wouldn’t be covered under those other types of insurance.
It’s called umbrella insurance because it sits “on top” of your other existing policies.
What Does Umbrella Insurance Cover?
While every policy may be different, an umbrella policy generally provides five basic categories of coverage: property damage, bodily injury, personal behavior liability, rental property issues, and legal fees.
Property Damage Liability includes any physical object, including:
- vehicles, houses, and other property damaged in an auto accident
- if your child damages someone else’s house
Bodily Injury Liability include injury that occurs as the result of:
- if your animal injures a person
- if someone is hurt while visiting your house
- a person is injured while you are operating a car, ATV, boat, moped, or other vehicle (as specified by your policy)
Personal Behavior Liability may include
- False arrest, detention, or imprisonment
- Defamation of character
- Malicious prosecution
- Shock/mental anguish
- Other personal liability situations
Rental Property Issues may include injury to the tenant, their family, or their guests while visiting a home that you own, or injury to someone else due to the behavior of your tenant, their family members, or their pets.
How Does Umbrella Insurance Work?
Umbrella insurance kicks in when you’ve reached the limits of your underlying policy. Let’s say you have an auto policy that covers $100,000 in property damage and a $1 Million umbrella policy. In the accident at the beginning of this post, you’re responsible for the tractor trailer, the two cars it hit, and the contents of the trailer (if damaged,) for a total cost of $200,000.
Your regular auto policy will pay the first $100,000 in damage, and then your umbrella policy will pay the next $200,000. If you did not have umbrella insurance, you would be personally responsible for that $100,000 in damages that exceeded the coverage of your auto insurance.
Do I Need Umbrella Insurance?
That depends. We all face liability every day, but certain factors make you more likely to be hurt by a liability lawsuit. We’ll call them the behavior factors (the things you do that make you more at risk of facing a liability claim) and the “what you could lose” factor (whether you have things to be taken or claimed in a lawsuit.)
Behavioral factors that may increase the chances that you’ll be sued:
- owning rental property
- having pets, especially dogs, super-especially breeds that have a reputation for being aggressive
- coaching a kid’s sport
- having a swimming pool, trampoline, or other potentially-dangerous recreational equipment
- owning guns or other weapons
- having horses, bees, or any other type of livestock or agricultural animals
- having other children or adults visit you at your house or another location where you are considered the host
What you could lose factors include everything to do with your assets and your earning potential. This includes the value of your house, cars, investment accounts, and also your income and future projected income.
If you can’t decide, I’d suggest you err on the side of caution. As my friend Jim Wang of WalletHacks says, “Umbrella insurance is relatively cheap and the peace of mind is worth it to us and our financial future!”
How Much Coverage Do I Need?
How much coverage you want depends on a wide variety of factors, including your net worth, your future earnings potential, and your perceived ability to pay. Basically, how much money is someone going to try to get from you in a worst-case situation?
Umbrella insurance is typically sold in $1 Million units, with coverage available up to $10 Million, depending on the company.
How Much Does Umbrella Insurance Cost?
Prices may vary a lot, but are generally very affordable. I pay $765 per year, or about $64 per month, for a $2 Million policy that covers two houses, two cars, and five drivers (including three teens.) For many people, the true expense in umbrella insurance comes from having the right insurance underneath the umbrella policy. Each umbrella policy is built around the underlying coverage limits. If you’re currently carrying small amounts of coverage, upping that coverage to the required amount will probably increase your regular insurance costs, but that’s OK. It’s much better than being underinsured.
Where Do I Buy Umbrella Insurance?
Most major insurance carriers offer umbrella insurance. Many require that you have your underlying homeowners/renters and auto insurance with them, too, but there are carriers that will let you purchase umbrella policies while maintaining your other insurance elsewhere. This is handy if you use multiple insurance companies for different types of coverage.
How To I Pick The Right Policy?
Umbrella insurance is better if it covers you for your biggest risks. Be sure to ask a lot of question and disclose accurately your lifestyle, including pets, weapons, dangerous hobbies, and safety hazards on your property.
With the high cost of property and medical care, it isn’t hard to exceed the coverage of even a substantial homeowners/renters or auto policy. Umbrella insurance will provide you with that extra liability coverage in the event you are found responsible for an accident that has damages larger than your insurance coverage. It’s relatively cheap for the coverage you’re buying, and it’s great peace of mind.
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