How Much Umbrella Insurance Do You Need?
Many people believe that if they are involved in a catastrophic accident at home or on the road, their automobile and homeowners insurance will provide them with adequate liability protection. However, carefully reading these policies will reveal that each has liability limits that quickly fall far short of what’s needed to protect themselves, and personal assets may have to be used or liquidated to satisfy the courts.
Umbrella insurance can provide the protection you need to avoid large personal financial losses. Just in case this type of insurance is new for you, or you haven’t revisited it in a while, here’s a quick refresher.
What Is Umbrella Insurance?
Also known as “excess personal liability insurance,” umbrella insurance sits atop your homeowners, automobile, and watercraft liability coverage and protects you by picking up where your other coverages leave off.
For example, if someone slips and falls on your property, the insurer of your home will pay for damages up to the liability limits on your homeowners' policy. If the damages exceed those liability limits, you can be sued for the difference. Your umbrella policy will pay a settlement or judgment if it’s determined that you were at fault. Even if you’re found not to be at fault, your umbrella policy will pay for your defense.
For the security it provides, umbrella insurance is worth the price. It’s generally sold in increments of $1 million of coverage for roughly $200 to $400 per policy year, with each additional one million of coverage costing about $100. Of course, the rates will vary depending on where you live and how many cars, homes, and boats you’re insuring.
According to the Insurance Information Institute, most insurance companies will only sell you an umbrella insurance policy if they provide your homeowners or auto policy. They’ll also require you to carry a minimum amount of homeowners liability coverage – usually $300,000. If you have auto insurance with them, the insurer typically requires liability coverage of $250,000 for bodily injury to one person and $500,000 per accident.
Assessing Your Risk
Car accidents most often trigger excess liability coverage. You’ve undoubtedly read or heard many times of cases where someone was permanently disabled or killed in an accident. Being involved in a serious accident is a risk everyone assumes when getting behind the wheel of a motor vehicle. The more you drive, the higher the risk, and it’s also higher if you insure teenage or elderly drivers.
If you employ domestic workers, own a swimming pool, RV, or dog, you may also be at higher risk. In addition, if you serve on the board of a nonprofit or homeowners association, you have an increased risk of being involved in costly lawsuits.
How Much Umbrella Insurance Do You Need?
The best answer to this is to add up your assets. If everything you own, including savings and investment accounts, adds up to worth more than $1 million, then that would be the minimum umbrella policy you need.
If you own luxury automobiles, recreational vehicles or watercraft, and a large home - you may need $2 million or more in extra coverage.
Some advisors recommend that you calculate your net worth, outside of retirement accounts, and include potential income if you’re likely to earn much more in the near future than you do now, to determine the right amount of coverage. If someone sues you and gets a judgment that exceeds your liability coverage, your future earnings may also be on the line and could be garnished up to 25%. To address this, consider multiplying your income by ten and adding that amount to your asset total. An insurance professional can help you determine what’s right for you.
Don’t Forget to Add UM/UIM Coverage
A number of years ago, one national auto insurer was well known for its slogan, “Watch out for the other guy.” That’s precisely why UM/UIM (Uninsured Motorist/Underinsured Motorist) coverage added as an endorsement to your umbrella insurance policy is vitally important.
Your auto policy can have a UM/UIM endorsement, but there is a maximum dollar limit that may be inadequate if a large claim should arise. Your umbrella policy with UM/UIM starts to pay when your auto policy has reached its limits.
The Insurance Research Council estimates that roughly 1 in 8 drivers on the road are not insured, which is alarming when you consider the number of cars you pass each day. For a number of reasons, mainly financial, some motorists simply don’t purchase auto insurance. If these drivers cause an accident, there isn’t an auto policy in place to reimburse you for any medical bills incurred.
Just as concerning is the driver with the lowest possible legal limit of liability coverage. They, too, will likely be unable to pay for all of your medical expenses in the event of an accident they caused.
Hit-and-run accidents, which occur more frequently than you might think, fall into the same category as uninsured motorists.
Is It Worth the Risk?
Lawsuits are one of the biggest threats to your wealth; the effects can be financially devastating. For several hundred dollars per year, you can have the financial protection (and peace of mind) that you need to preserve the assets you’ve worked so hard to accumulate and enjoy.
To protect yourself from unnecessary risk, call Kelly Klee at 844-885-1600. We’ll explain your coverage options, and you’ll be able to rest easier knowing that you won’t be under-insured if the unexpected happens.