Umbrella

umbrellaAn umbrella policy provides an additional layer of insurance, typically $1 million or $2 million, above your auto insurance and your home insurance liability coverage. While it’s easy to assume that only a rich person could need that much insurance coverage, you’d be surprised at how important an umbrella policy can be for an average member of the middle class. For example, if you have a car insurance policy with liability coverage, you may think you have enough protection in case of an accident. Although 85 percent of umbrella insurance claims are related to car accidents, the policies offer protection against accidents that occur at your home, too — for example, in case someone falls down your stairs and sues you, or your balcony collapses during a party. Many people opt for an umbrella policy because they have a pool on their property and fear the consequences of a child getting injured.

Another important feature of these policies is protection in a lawsuit against you for slander or defamation of character, or for decisions you might have made as a volunteer member of a nonprofit board. If you regularly blog about controversial topics or rant on Facebook, an umbrella policy just might be a good idea to protect your assets from a litigious individual who believes you’ve damaged their reputation.

That may sound unlikely, but it’s not unheard of. In 2009, a high school student sued four other students and their families for $3 million because of derogatory comments the other students made about her on Facebook. While the lawsuit was eventually dismissed, reaching that verdict took two years and required considerable expenditures by the families. An umbrella policy can cover expenses related to such lawsuits.

You Have More to Protect Than You Think

You may be assuming that if you don’t have $1 million to lose, you don’t need an umbrella policy. Unfortunately, if you are sued by someone who falls down the stairs at your home or whom you injure in a car accident, you can be sued for more than just what you have in the bank.

Your retirement funds, investments, savings and even your future earnings are at risk if a judge allows someone to garnish your wages to pay off a settlement. In some states, the equity in your home can be part of the judgment and you would be forced to sell your home to pay someone who sues you.

If you own a house and have a retirement account or other investments, an umbrella policy of $1 million or more should be part of your financial plan. Most insurance companies offer these plans in increments up to $5 million, and some go up to $10 million.

Insurance companies require specific levels of liability coverage on your auto and home insurance policies before they will approve an umbrella policy, typically:

  • $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowners insurance policy
  • $250,000 per person for bodily injury and $500,000 per accident on your car insurance policy
  • $100,000 per accident for property damage on your car insurance policy

The average cost for a $1 million policy is $200 annually — which you might find a relatively low price for the peace of mind and security it offers.