Why Might Umbrella Insurance Be a Good Idea

January 27, 2012

Some people may wonder why an umbrella insurance policy is necessary, but it's easy to imagine; you're driving along one day and you drop something on the floor. You reach down to pick it up and take your eyes off the road for just a few seconds, and the unthinkable happens. You get in an accident, or even worse; you injure a pedestrian. These types of accidents happen every day, and the financial consequences can be extreme. Sure, you have an auto insurance policy for $250,000 but what if the settlement (or judgment, if it goes to court) is $600,000? Settlements for severe car accidents can even reach into the millions of dollars. That's one reason that even average people may want to consider extending their coverage with umbrella insurance in order to protect assets like their homes and other investments.

Umbrella insurance is also called "Personal Liability Insurance," and it gets its name because it protects the customer from liability claims that go above and beyond all the policies underneath it. For example, you have a traditional auto insurance plan with a coverage limit (or limit of liability) of $500,000 and you add an umbrella plan of $1,000,000; that extends your insurance protection to $1,500,000. The traditional auto insurance plan you already have is "primary."  That means that if something happens, that coverage pays first. The umbrella plan is "secondary" that means that your umbrella plan comes into affect only when it's needed (i.e. when the customer is found to be liable for an amount that exceeds the primary coverage). Keep in mind that because an umbrella plan is meant to be used in conjunction with a traditional insurance policy, it almost always has a very high deductible (usually $300,000 or more).

Some people don't invest in umbrella policies because it doesn't seem like something they would ever need. It is true that it's not very likely that you will ever use an umbrella plan; but if you do end up needing it and you don't have it, you'll sure wish you did. One nice thing is that because umbrella policies are rarely used, they may not add very much to your current premium. In many cases, an umbrella plan will only add around 10% or less to your current premium. The cost of the policy depends on a few things; like how many traffic tickets you've had in the past few years, or possibly what's on your credit report. An Umbrella insurance plan is usually sold in increments of $1,000,000; but you can select the coverage that suits you best up to $5,000,000 or more. For the typical consumer, the premiums are usually between $200 and $300 per year for each $1,000,000 worth of coverage. That means for coverage of $2,000,000 you should expect to spend about $400 to $600 annually.

Another benefit of an umbrella plan is that it covers your personal liability in other areas as well. For example, it will extend the same limit of coverage onto your homeowner's insurance policy. If something were to happen on your property and you were found liable, the same umbrella coverage will be in effect for that situation that you use when you drive your car.

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