What Is an Umbrella Insurance Policy and Is It Right for You?
In today's highly litigious society, you can really never be too careful. As a single father, I am constantly worried about injuries when my son's friends are over playing in the yard. If a kid trips on a crack in my sidewalk, am I liable? How about a swimming pool injury? These concerns have made me seriously consider getting an umbrella insurance policy.
Umbrella Policy Defined
An umbrella insurance policy is liability insurance designed to protect the assets and wealth of the policyholder. It offers liability coverage above and beyond what a standard homeowner's policy includes and what you may have with other forms of insurance, such as your auto policy. Essentially, it serves as extra insurance against lawsuits.
An umbrella insurance policy can also insure you against risks not ordinarily covered by your homeowners and auto insurance policies. Some examples include false arrest, invasion of privacy, libel, and slander. It's designed to give you additional protection against being sued for injuries and property damage to others.
Advantages
- Inexpensive. Of course, the terms of the policy and what it covers will have an effect on your premium, but generally speaking, a basic policy with a $1 million limit covering two people, automobiles, and a home costs approximately $250 annually.
- Can Be Used for Attorney's Fees. If somebody sues you for any reason covered under the policy, you can file a claim for your attorney expenses.
- Offers Comprehensive Protection. While an umbrella policy doesn't cover every situation for which you might find yourself liable, it does cover bodily injury to others, damage to other people's property, and claims associated with rental units you own. As policies differ, be sure you know exactly what your policy does and does not cover.
Disadvantages
- Doesn't Cover Your Personal Property. Generally speaking, an umbrella insurance policy only covers damage to other people's property, not your own.
- May Not Cover Punitive Damages. In any lawsuit, one of the biggest fears is an excessive judgment in terms of punitive damages. In other words, if the judge determines that you've done something egregiously wrong, he or she may require you to pay an excessive amount as a form of punishment. Punitive damages are highly subjective, and laws surrounding them vary from state to state. Your policy may not cover these.
- Doesn't Cover Claims Against Your Business. If you own a business, a traditional umbrella insurance policy may not protect your business assets. Instead, you may need to purchase an additional business umbrella insurance policy specifically for that purpose.
Is an Umbrella Policy Right for You?
People often underestimate the value of their assets. If the value of your assets exceeds liability coverage on your existing homeowner's policy, getting umbrella coverage is probably a no-brainer. But even if you have minimal assets, you may want to protect assets and future wages by purchasing an umbrella policy, as wages can be garnished if you're on the losing end of a lawsuit. If you own rental property, an umbrella policy is probably vital.
Ultimately, it's up to you. Regardless of your financial situation, the peace of mind may be worth it to you.
Final Thoughts
A good way to decide whether you need umbrella insurance is to talk it over with the agent who handles your auto and homeowners insurance policies. Just keep in mind that the more at-risk you are, the better it is to get an umbrella policy. For example, if you have pets or young drivers, you are more likely to get sued, and the added protection may be well worth the extra expense.
What are your thoughts on umbrella insurance policies?
David Bakke is a financial contributor for Money Crashers Personal Finance. He discusses important tools such as banking accounts, insurance, investing options, and more.
