Finances & Money

Insurance: Do You Have An Umbrella For A Rainy Day?

Shawn, a subscriber and frequent commenter here at Clever Dude, as well as a personal friend of the Clever Dude and Dudette will posting occasional guest articles. You can read his introduction here.

By Shawn

Earlier this year, the Clever Dude wrote a series of articles about Fixing Your Money Mistakes. One of the topics he covered was insurance.

He covered a variety of insurance types (home, auto, and life), however, while doing some research as to whether my wife and I had enough insurance coverage, I learned of a type of insurance that I had never heard of — personal umbrella insurance.

Basically, a personal umbrella insurance policy is one that covers you above and beyond the coverages in your home and auto insurance. Now, you might be asking, “Shawn, if I already have home and auto insurance, why would I need additional insurance?”.

If you’re like me, and millions of other people, you have pretty basic coverage in your auto insurance policy — 100/300 liability coverage. What this means is, if you’re in an accident in which you’re determined to be at fault, the insurance company will pay at most $100,000 for each person injured or killed in an accident up to a maximum of $300,000 per accident. Our homeowner insurance has the same $300,000 cap per accident.

If you happen to be in a situation where someone is seriously injured or killed in an accident in which you are at fault, chances are, they could win much more in a lawsuit than your insurance company will pay. In this case, the plaintiff will be able to seize most of your assets in order to make up the difference — equity in your home and cars, savings accounts, even your 401k.

This is where a personal umbrella policy comes into play. The policy will cover you above what your base policy pays up to a set limit. These policies are typically purchased in $1 Million increments.

Your next question might be, “How much does this cost?”. Well, that depends on where you live and the insurance company you have, but, from my research, I’ve found that the first $1 Million in coverage costs about $150 per year and each additional $1 Million costs 50-75 dollars per year extra.  There is a hidden charge to these policies, however.  Most insurance companies will require you to up your liability limits on your auto insurance policy from 100/300 to 250/500.  The rationale behind this is that the umbrella policies typically have a deductible of $250,000.  The amount paid out by the base policy would cover the deductible.  If you only had 100/300 coverage, you would need to pay $150,000 out of pocket before the umbrella policy would kick in.

Probably one of the best selling points of these policies is, if you happen to ever get sued for any of the situations covered by the umbrella policy, the insurance company will hire and pay for a lawyer to defend you. That benefit alone can save you thousands of dollars in legal fees.

Since reading about these policies, I’ve decided that it’s in our best interest to have a personal umbrella policy. Our next step is to determine how much coverage we will need. In order to do this, you will want to sit down and examine your assets to ensure you elect enough coverage to protect them.

Do any of you have any experience with umbrella policies? What are your thoughts or suggestions?