When it Rains it Pours
Umbrella insurance is extra liability insurance. It helps to protect you and your assets from major claims and big-ticket lawsuits. An umbrella insurance policy provides liability above and beyond the limits of your insurance policies and may cover claims that are excluded by other liability policies.
No matter how hard you try to avoid them; accidents happen. If you were to cause a major auto accident involving property damage and or extensive injuries to other parties, your hard-earned assets could be at risk. The costs of the property damage, injuries to other parties, and or subsequent lawsuits add up quickly and may exceed the limits of your auto insurance in no time. It is not simply auto accidents you need to worry about. There are other types of accidents as well. Imagine this: You’re having a graduation party and someone slips, falls, and is injured. Think you won’t be sued? Think again. In today’s society, lawsuits are common…and costly. A lawsuit has the potential to destroy your financial security, but an umbrella insurance policy may protect you.
Examples of umbrella insurance benefits include protection from the following:
- Significant property damage. Your standard auto insurance liability limit may be exhausted if you are at fault in an auto accident where you destroy another vehicle and/or other property.
- Serious bodily injury liability. Your homeowner’s insurance liability limit may be insufficient to cover medical and other costs related to a guest falling off a balcony at your home, or being bitten by your dog.
- Landlord liability. A tenant might file an expensive suit over an injury sustained while renting your property.
Libel or slander. Lawsuits could result from something that you say or write about another person.
- Malicious prosecution. You may file a suit against someone and in turn be sued for wrongfully, or maliciously, prosecuting that individual.
The right umbrella limits for you depend on where you live, your profession and your aversion to risk. Liability coverage in home and auto policies rarely exceed $500,000, yet 13% of personal injury liability judgements and settlements are $1 million or more, according to a report, citing data from Jury Verdict Research. The amount of coverage you choose should bear some relation to your net worth.
When trying to determine the right amount of coverage to carry, consider these items:
Total Assets: Setting your umbrella limit based on your total assets will give you more protection than basing it off of your net worth. Instead of matching your liability coverage to your net worth, these advisors recommend coverage equal to the value of your assets without regard for your debts (this could help you avoid selling your home to pay a judgment if your net worth is your home equity, for example). Applying this to the example above, then, you’d want at least $500,000 of liability insurance, because the assets total $500,000. You may need an umbrella policy if your insurer’s basic liability coverage limit is less than $500,000.
Future Income: But that’s not all. 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 percent. To address this, consider multiplying your income by five and adding that amount to your asset total. If your total household earnings are $100,000 a year and you have $500,000 in assets to protect, you may want a $1 million policy. You’d almost certainly want umbrella coverage.
Collateral Damage: Another facet of this examination is the potential damage to others. If you’ve got two teens entering college, plan to retire soon, or are supporting aging relatives, a financial wipeout could be catastrophic and possibly permanent. That’s another indication you might need to expand your liability insurance with an umbrella policy. If you’re young, single, broke, renting and healthy, losing everything you own would be terrible, but you’d probably recover eventually.
Like any insurance, an umbrella policy should bring you some peace of mind. With any luck, you’ll never have a circumstance where you need to use the coverage. But bad things do happen, and just knowing it’s there is one way of knowing you’re prepared to deal with a tragedy or accident beyond your control — at least from a financial aspect.
Pogol, Gina. “Umbrella Insurance Policy: Because When it Rains, it Pours.” Inurance.com Quinstreet, Inc., February, 21 2017. Web. April 24, 2017.
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