They are the scenarios no one wants to imagine: Your teen driver takes a turn too quickly and hits a pedestrian, paralyzing her. Or maybe a neighbor drowns in your swimming pool.
These are terrible events, and they can lead to costly lawsuits. Does your standard homeowners or auto insurance policy protect you?
To a point. But if the damages that injured parties or their relatives are seeking are too large, your standard insurance policies might not provide enough coverage to prevent you from a financial catastrophe.
That's where umbrella insurance comes in. This insurance provides additional liability coverage above the limits of your homeowners, auto and other insurance policies. It protects you in case your auto or homeowners policies don't provide enough coverage to pay for all of the damages against you.
"We consider umbrella coverage essential for most individuals and families," said Kevin Gahagan, principal and chief investment officer with San Francisco-based Mosiac Financial Partners. "While the risk of a catastrophic claim is relatively low, should one arise it can quickly bankrupt even those with significant resources."
How umbrella insurance works
Say your auto insurance policy provides liability coverage of $250,000. If you or someone else in your family causes a serious accident, you could face a claim that runs into the millions of dollars. If you only have standard coverage, you could lose your most valuable assets — including your home — to help cover the costs if you are sued.
Say an auto accident results in a liability claim of $1 million. Your auto insurance coverage would pay out the first $250,000. But then you'd still owe $750,000. To pay that, you'd have to give up your most valuable assets.
Umbrella coverage protects you from this. Once a claim consumes all of the liability coverage of your standard policy, the additional umbrella coverage then kicks in. The rest of the claim is paid out by the insurance company providing you with umbrella coverage. You don't have to worry about losing your assets.
Attorney Garrett Sutton, founder and owner of Reno, Nevada-based Sutton Law Center and author of the book "Start Your Own Corporation," says that umbrella insurance is an effective way to keep attorneys from going after your assets. They won't need to go after the equity in your home, say, if your umbrella policy will provide their clients with the funds for which they are suing.
"When I am talking to people about asset protection, I always recommend a mix of insurance and other entities," Sutton says. "If you just have regular insurance, attorneys can go after your other assets. Even if you don't have a lot of other assets, you can still end up losing those you have if you don't have enough insurance coverage."
Umbrella insurance is affordable
Umbrella coverage is inexpensive. The Insurance Information Institute says that you can expect to pay about $150 to $300 a year for $1 million worth of liability protection. You'll usually have to pay an extra $75 a year if you want an additional $1 million of protection, according to the institute. And if you want even more protection, you'll pay about $50 for every additional $1 million worth of liability coverage, the institute says.
There's a reason this kind of insurance is so affordable: The big catastrophic claims that it covers are relatively rare. Just because they are rare, though, doesn't mean that they can't happen to you.
You might, though, have to meet certain limits with your existing auto or homeowners insurance policies to qualify for umbrella coverage. According to the institute, most insurers require you to have at least $250,000 worth of liability coverage on your auto policy and $300,000 on your homeowners insurance policy before they will sell you an umbrella policy.
Sutton says that most of his clients understand what umbrella insurance is and the protection it provides. But not everyone does, he adds. And they are missing out an inexpensive way to protect the assets they've worked so hard to acquire.
"Many of the people I speak with are genuinely surprised when they discover how inexpensive an umbrella policy is," Sutton says. "You get a lot of coverage for a low price."
You don't have to be rich
Carol Berger, a financial planner with Berger Wealth Management in Peachtree City, Georgia, says that too many consumers think that homeowners only need umbrella insurance if they are rich, own a business or own a particularly valuable home.
That's not true, Berger says.
It is true that wealthier people have more assets to protect. But even if you own a modest home, you don't want to lose it should someone sue you for millions of dollars. Berger says that because of this, she recommends a minimum of $1 million in umbrella coverage to all of her clients.
"It is pretty affordable coverage and, in my mind, is a no-brainer," Berger says.
Only those homeowners with very few assets should even consider relying on the $300,000 to $500,000 in standard liability coverage that comes with their auto and homeowners insurance policies, Berger adds.
Sperry Mylot, director of corporate communications for national insurance firm Travelers, agrees, saying that anyone who owns a home is a good candidate for umbrella insurance.
"Whether it's a serious auto accident or an incident on someone's property, both could involve expensive medical bills," Mylot says. "Homeowners can quickly find themselves responsible for damages that exceed the limits on their policies, and that's where umbrella insurance can help."
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