Having regular insurance is great. When things go wrong, it can provide you with a safety net to cover the risks.
But what if your losses are bigger than your insurance coverage?
This is a huge catastrophe for you unless you have an Umbrella Insurance Policy.
Why Do You Need the Umbrella Insurance Policy?
Imagine finally getting your dream house, and dream car which is both fully paid plus you’ve got quite a sizable amount of savings in your account.
You’re thinking of finally settling down now that your total assets are close to reaching a million dollars.
On your way to work one day, you realized that you were running late and decided to speed up at a red light.
Unfortunately, you accidentally hit another car. The damages that you sustained from the collision are not that serious and can be fully covered by your existing auto insurance.
However, since you are at fault, the court has ruled out that you must pay $500,000 to the other party involved in the accident.
This will cover the medical expenses, car damages and loss of income due to the accident.
This is already a huge sum for you, but it still does not include the legal fees from the trial.
Relying only on your existing insurance in this scenario will leave a large dent on your savings and assets.
However, if you have availed the Umbrella Insurance Policy, you can save yourself from a lot of headaches brought by this mishap.
Not only will it cover for the $500,000 liability that you owe but it will also handle your legal bills.
What is an Umbrella Insurance Policy?
The example above can already give you an overview of what umbrella insurance policy is but to help guide you further, we will be covering all the basics that you need to know to help you decide if this investment is for you.
We will start off with the basic definition of umbrella insurance.
This type of policy is additional liability insurance for one’s basic policies like your home, auto and boat insurances.
This means that Umbrella Insurance covers any excess charges that may arise once regular insurance policies are fully consumed.
This will also protect those who might be sued for any damages that they may cause others due to accidents.
The policy can also protect your assets by providing coverage for claims not included in other liability policies such as libel and slander cases.
What does it cover?
Accidents are inevitable, and even if you observe utmost diligence, it may still occur.
Umbrella insurance provides a safety net to liabilities arising from damages caused to third persons caused by unforeseen events or when your standard insurance reaches its limit.
Certain kinds of damages covered by this insurance are but not limited to:
- Physical Injury
- Property Damage
- Legal Fees
Being in a car crash and causing injury to a person, you are faced with medical bills that usually exceeds your motor insurance coverage.
Having umbrella insurance will get you protected. Similarly, when you are in the balcony of your house, and you accidentally pushed your flower pot, and unfortunately, a neighbor was passing by at that time got hit by the pot, this will not be covered by your homeowner’s insurance, but umbrella insurance will.
Other coverage includes dog bites or any other injuries your pet may cause, both physical and property damages.
Umbrella insurance cover property damage in most but not all circumstances. You still have to determine the extent of the damage based on repair estimate.
It is great to have pets which some consider a friend or as part of their families but certain breeds or certain may tend to be more aggressive or may be too active and accidents are most likely to happen.
Another benefit of Umbrella Insurance is that it provides coverage includes dog bites or any other injuries, both physical and property damages, your pet may cause.
Some people practice a profession or get in activities that increase their risks in getting into lawsuits such as being a financial planner, owner of a construction company, writing articles, giving reviews to some products or services; Umbrella Insurance protects you against libel, false arrest, insult and defamation and invasion of privacy.
Being a coach or participating in some sports, owners of recreational sites, rentals of cars and others may also cause harm to others. Let us say in this situation you’re not at fault; you still have to defend and attend these cases. Fees paid to lawyers are usually costly but having umbrella insurance, you can be sure that you’re in the hands of a good lawyer in protecting your hard-earned assets.
What’s not covered?
Umbrella insurance keeps you protected from most types of liabilities and lawsuits. However, there are still types that are excluded. Some of them are:
Compensation claims against employers
During working hours, employees may suffer bodily injuries. Employers will be held responsible for these incidents.
Instead of having to worry where to get funds for treatments or of having to face lawsuits filed by these workers, umbrella insurance can help businesses in avoiding certain unexpected expenses thus helping maintain or even increase your net profits.
Business-related accidents leading to losses
Construction companies usually have higher risks of getting into accidents.
We often hear news where buildings, bridges or construction site collapse or even small debris falling from the site can already cause serious injuries.
Umbrella insurance will help lessen the liabilities to be shouldered by the management and owners. Some business-related accidents may also include oil, chemical spills or gas leaks from manufacturing companies.
Malpractice of Profession
In the practice of certain profession especially in the medical and legal fields, malpractice insurance policies are usually availed by businesses.
In any case, you get sued and the liabilities exceed your malpractice policy, your umbrella policy may not be of help.
Any intentional damage to person or property
Some people avail insurance just for the sake of having one and for the life insurance benefit that goes with it. People sometimes take advantage of this and cause harm to others or their properties to be able to claim the coverage money. Umbrella Insurance will not answer any liabilities arising from intentional damage as it may urge people to commit fraud.
Umbrella insurance typically does not cover flood damage. It will only cover damages to property and bodily injury that you caused.
An important thing to remember is that umbrella insurance only protects you against lawsuits due to damages you’ve caused to the third person.
Any injuries or personal damages, your personal or homeowner’s insurance will be the one responsible for paying for any operation or medical charges.
Any excess cost will still be shouldered by you and will be considered as out-of-the-pocket expenses.
How Much Umbrella Insurance Policy should I Buy?
Umbrella insurance policy commonly requires a minimum of 1 million dollars in coverage and are usually sold in increments of 1 million dollars.
This means that if you want to increase your policy coverage beyond $1 million, the next smallest policy that you can avail is $2 million dollars in coverage.
There are also some companies that can offer in increments of $5 million and $10 million.
When choosing how much coverage you need to buy, you can consider the following:
• Net Worth Based Coverage
This is the most common method used in determining one’s umbrella coverage. Your net worth is computed by adding your assets which includes your house value, car value, savings, and other investments and subtracting your liabilities which consists of debts and loans.
Check your existing liability coverage which includes all common insurance policies that you already have (homeowners and auto insurance).
Subtract your existing liability coverage to your net worth and the resulting amount is your total assets that are not protected. The umbrella policy that you avail should cover this.
An example would be having total assets worth $1 million and debts which amounts to $250,000. You have a net worth of $750,000 but your existing insurance only covers for $250,000. This means that your umbrella coverage should be at least $500,000.
• Asset Based Coverage
If you want extra coverage, then you might want to base your umbrella insurance on your total asset amount rather than your net worth. This will ensure that you don’t have to sell your existing asset to cover damages that exceed existing insurance.
In the example above, your umbrella policy should have coverage of at least $1 million for added security.
• Potential Income Based Coverage
Since liability lawsuits can affect not only your current assets but also your future income, you might want to consider purchasing coverage that considers your earning potential.
Considering the example above, if you are earning $200,000 a year, your umbrella insurance should cover at least 5 times of your annual earning which is $1 million and your asset amount which is another million. Total coverage should be at least $2 million.
How much does Umbrella Insurance Policy Cost?
Although the typical coverage is high for the umbrella policy, the cost is much lower than you think.
You can easily avail a $1 million coverage for at least $150 to $365 a year depending on your insurance provider.
Another good point for the umbrella insurance is that doubling your coverage does not necessarily double your cost.
How to Claim your Umbrella Insurance
When making your umbrella insurance claims, simply follow the process below:
1. Contact your current liability insurance company to file for a claim. For instance, if your house is involved in an accident, immediately notify your homeowner's insurance company to file for a claim. The same process will apply for car insurances.
2. Your homeowners or auto insurance will provide coverage up to the defined limits.
3. If the damages are greater than your coverage, notify your umbrella insurance provider and file for a claim. Lawsuits from the accident cases may be also be included in your filling of claims.
4. Your claims will be assessed if eligible or not and if they fall under the coverage stated above.
5. Eligible damages that exceed your insurance coverage will be paid by the umbrella policy up to the coverage limit that you purchased.
Other Important Details
If you are still in doubt whether to invest in the Umbrella Insurance Policy, here are some additional guidelines to help you in your decision:
• You don’t need a $1 million dollars of net worth to avail the umbrella policy.
Although the minimum coverage is a million dollars, this does not necessarily mean that you need to have a net worth or a total asset value of the same amount.
Umbrella insurance is usually recommended for those with a higher asset amount compared to existing insurance coverage. This means that if your house is worth $1 million and the homeowner’s insurance only covers $500,000, the umbrella policy can cover for the rest of your assets.
• Base Insurance Coverage is Required
Most providers require a certain amount of base coverage for your existing insurance which mostly depends on your provider. From Investopedia, common required base coverage for auto insurance is $150,000 to $250,000 while homeowner’s insurance is at $250,000 to $300,000.
• Cost of Your Umbrella Insurance may vary
We have provided estimates above on the potential cost of your umbrella insurance, but it may still vary depending on several factors.
The factors include your job in which the premium charged for accident-prone jobs may be costly than others, your properties especially if you have several rental houses, pets that may be considered aggressive and the variety and number of vehicles owned.
Even your driving records and previous records may impact the amount you pay.
• Consider bundling Your Insurance
One tip in getting the most out of your insurance is bundling them. This means that you must consider buying your umbrella policy in the same insurance provider as your homeowners and auto insurance.