A personal umbrella policy is sometimes misunderstood.. That's unfortunate because the personal umbrella is an insurance “best buy”. It is inexpensive and does its job well. Let's take a look at just what this policy does, determine if you need one, and decide if it's worth it to purchase a policy for yourself. We'll look at factors that set the cost of a personal umbrella. And finally, give you a few tips to keep in mind when personal umbrella shopping.
What is a Personal Liability Umbrella Policy?
The personal umbrella is a form of liability insurance. A great deal of confusion is eliminated if the word “liability” is inserted between the words “personal” and “umbrella”. That means it protects you from bodily injury and property damage for which you are legally liable.
I will use the term personal umbrella. But just remember it is a form of liability insurance. Some consumers believe it is a catch all policy that insures property. Not so!
A personal umbrella “floats” over your other liability policies. For example, let's suppose your automobile insurance limits are $300,000 per person/ $300,000 per accident /$300,000 property damage. If you invest in $1,000,000 personal umbrella policy you will have increased your auto liability protection by $1,000,000. So now you have auto liability protection of $1,300,000.
A key benefit is it gives you an extra layer of protection over all your policies with liability coverage. Your homeowners, renters, auto, boats, motorcycles, second home, etc. will now have an extra layer of suit protection. That is why it is called an “umbrella” policy.
The most common personal umbrella limit is $1,000,000. However, more families are deciding that a $1,000,000 limit is not enough protection in today's litigious society. So consumers are buying personal umbrella policies with higher limits. Limits up to $10,000,000 are available.
Do I need an umbrella policy?
When I hear that question from clients, my answer is, “Probably”. You can determine if you need an umbrella policy by answering three questions:
- Do you earn a pay check?
- Do you own anything?
- Do you want to keep what you own and your full pay check?
These questions may sound a bit silly, but I am being very frank. You see, when an attorney is seeking damages, he will take what he can get for his client. That means your personal assets and your future earnings are on the line when you are sued. If you have no assets, once an attorney gets a judgment, he will use a garnishment to get to your future earnings.
So the question you must decide is can I get rid of this risk? A personal umbrella is a giant step in eliminating the risk of attorney fees and a large judgment against you.
Is an umbrella policy worth it?
Your appetite for risk will determine if a personal umbrella is worth the peace of mind it provides. Let's explore this question a little more. A journalist, who claims to be a financial planner, recently wrote that since only a small percentage of lawsuits were over a $1,000,000 dollars she did not think it was necessary for the average family to consider an umbrella liability policy.
It is true that most lawsuits are under $1,000,000. However, the number of large lawsuits is growing. And if you happen to be the unfortunate one to be sued for a large amount, the financial and emotional impact is devastating. Think of it this way… the number of policemen shot on duty is small, but does that justify a policeman not wearing their bullet proof vest?
The other issue is attorney fees. Consider for a moment suffering a judgment of $500,000 with attorney's fees of $300,000. Excessive? Not if you consider it is wholey possible to be sued for $3,000,000 and have a complicated defense involving numerous specialists. A personal umbrella would pay the judgment and attorney costs.
Most professional financial planners advise you to pass the risk of a large personal loss to an insurance company. So they recommend purchasing a personal liability umbrella. They say it's worth it.
The personal liability umbrella is a good risk management technique for most people. Personal umbrellas provide high limits of protection for an inexpensive price.
How much does it cost?
Cost is an important consideration when shopping for a personal umbrella policy. The price varies depending on the exposure to risks. For example, if you have a home with a pool, two cars, young drivers, a boat, a motorcycle and vacation home, you have more exposure to lawsuits than a family with a home, and two cars. So the family with more toys will pay more for a personal liability umbrella policy. It is really that simple.
Prices for a personal umbrella insurance policy start at $125 annually. The family with two cars and a home will likely pay between $180 and $250 a year for a $1,000,000 policy.
What else do I need to know when shopping for a Personal Liability Umbrella policy?
- You cannot pick and choose what exposures you want covered. For example, if you own a boat you cannot exclude it from coverage under a personal umbrella policy.
- The company issuing your personal umbrella policy may require you to raise the underlying liability limits on some of your policies, if those limits are too low.
- Some companies will write a personal umbrella policy even if they do not write your underlying policies.
- Most personal umbrellas do not cover business risks of any kind.
The personal umbrella policy is widely available and is an inexpensive risk management tool. It allows you to manage your risk in our changing world.