Let's start by dispensing with many of the myths
surrounding umbrella liability coverage.
All of these myths are incorrect. Umbrella liability
is relatively affordable, can be easily coordinated with your
existing insurance policies and by no means is it just for the well-to-do.
Umbrella liability insurance is so named because it
acts like an umbrella, sitting on top of your auto and homeowner's
liability policies to provide extra protection. (Even if you don't
own a home, remember that you still need renter's insurance to cover
both your liability and your personal property). Some examples of
where umbrella coverage often comes into play:
An auto accident in which you're sued under your auto
Your neighbor slips and falls on your property, and
you're sued under your homeowner's insurance.
A natural disaster in which another person's property
is damaged by, say, a tree on your property crashing down on their
vehicle or home. This usually falls into the, "I thought that
was covered by my homeowner's policy" category.
Your auto and homeowner's policies have at least some
liability insurance that would be used to settle legal claims. But
what if a settlement (or judgment, if it goes to court) is $800,000
and you only have $300,000 of liability insurance? The insurer would
pay its $300,000, but where are you going to get the other $500,000?
Virtually everything you own would be fair game to pay off the debt.
The only good news is that some states protect certain assets (like
your home) from seizure.
Worried? You should be. With America's love affair
with lawsuits, you can't afford to not have umbrella liability insurance.
Umbrella liability insurance pays $1 million, $2
million and sometimes even $5 million or more of a claim, on top of
what your basic policies will pay. You're usually able to set the
amount. For the protection you get, umbrella liability coverage is
not very expensive. Premiums are usually $200 to $300 a year for $1
million worth of coverage. The cost depends on such criteria as the
amount of coverage, the insurance company issuing the policy and your
own "personal risk factors" (such as the number of traffic
tickets you've gotten in the past few years, and possibly your credit report).
When people do buy, they often don't buy enough. For
example, you may have assets worth $1 million, figure that you need
enough coverage to protect your assets, and therefore buy a $1
million policy. But what if a judgment of $2 million is handed down?
We often hear of juries awarding $20 million; it should be obvious
that the amount of someone's assets isn't taken into consideration.
In either of these cases, you would lose all of your assets and still
owe money. Your future income, if you have to make settlement
payments over time, could easily be jeopardized. The same goes for
any inheritance you may receive (it could easily be seized for
payment), not to mention any inheritance you may want to leave your children.
How much you own is irrelevant when deciding how much
to purchase. Do you live in a wealthy town, where you could be an
easy target for a big settlement? Do you travel a lot? Do you
entertain a lot? Do you operate a home-based business and have
employees or clients coming to your home on a regular basis? (Many
self-employed people wrongly assume that this is covered in their
homeowner's policy.) If you answered yes to any of these questions,
it is particularly important for you to have umbrella liability insurance.
Umbrella liability insurance usually carries a high
deductible of $300,000 or more. It's designed not to kick in until
your other policies are tapped out. The illustration below shows how
umbrella insurance is coordinated with your auto and homeowner's
policies. Typical umbrella policies require you to have homeowner's
and auto liability insurance equal to the amount of your deductible.
It's a good idea to try and get your umbrella liability, homeowners,
and automobile policies from the same company; there's usually a
substantial premium discount. Additionally, you eliminate the
potential nightmare of dealing with different insurance companies if
something should happen, where each would likely try to shift payment
responsibility to the others, leaving you caught in the middle.
It's depressing to think of all the liability risks
you take, any of which can instantly decimate even the best financial
planning strategy. Keep in mind that it's fine to take calculated
risks - for example, if you don't drive your car every day and you
infrequently have people on your property, you may decide that
instead of spending money on umbrella premiums you'd rather take the
risk that you will never be hit with a liability lawsuit. This
strategy is called "self insurance." (In fact, you're
automatically self-insured if you don't have any insurance coverage.)
Umbrella coverage, if nothing else, offers
psychological comfort. You'll know that if your neighbor falls on
your front steps or you rear-end the car in front of you that you're protected.