I have never professed to know everything there is to know about money and finances, and I am reminded of that on a fairly regular basis. Recently, I came across the term “umbrella insurance” and realized that I basically knew nothing about it. I had heard of it before but really had no idea what it was, what it covered, and most importantly, not knowing if I should have it. We typically think of buying and paying for insurance as a nuisance until it really comes in need. I know that a lot of people have had horror stories with rejected insurance claims and bad experiences with adjusters and agents, but for the most part, insurance DOES save you from big financial disaster. Umbrella insurance is not a “necessity” when it comes to your portfolio of insurance, but for some people, it might make sense to have it. The following is a synopsis of what I found out:
What is it?
By definition, umbrella insurance is a liability-type policy that will protect the assets and future income of the policy holder above and beyond the standard limits on their primary policies. The term “umbrella” refers to how the policy covers one’s assets more broadly than their primary coverage. At the risk of sounding ignorant, I had to read that three or of our times to myself before it even began to make sense, and even then I was still a little confused.
So, after I really dug into this thing, here is a layman’s definition for umbrella insurance. The most basic definition that I could come up with for it is “lawsuit insurance.”
What Does It Cover?
What an umbrella insurance policy will do is give you added protection against lawsuits that arise from damage to someone else’s property or injuries from an accident. It also covers a variety of other things including false claims, false arrest, invasion of privacy and so on. There are some things that it won’t cover, though, so get the details before moving forward.
It can also provide what is considered “fill in the gap” coverage, where some of you other policies may not be adequate. Policies are usually written in increments of one million dollars.
What Does It Cost?
Of course, the actual costs of the policy will vary depending on your needs and so forth, but it looks like a ball park figure for a $1 million dollar policy for two people, cars, and a house will run you about $200-$250 annually. I was quoted $240 by my insurance agent. This works out to about ten bucks a month per person per year. In the grand scheme of things, it is not that expensive at all.
What Is It Really For?
Twenty years ago, I would have said that umbrella insurance would be better called “paranoia insurance.” What this insurance covers you on are catastrophic accident type things. A tree on your property falls down on your neighbor’s house in a storm. You dog bites somebody. You are found to be at-fault in a major car accident.
However, in this lawsuit-happy society that we live in today, getting sued at some point in your life is less about paranoia and more about reality. I’m not saying that the percentages say that you will be sued at some point it your life; lawsuits are just much more prevalent these days. Even if some idiot out there decides to sue you for some ridiculous reason, remember, you still have to defend yourself. An umbrella insurance policy would help defray the costs of this defense.
Do You Need It?
This is really a personal choice that you have to make for yourself, but you can base it on some facts. The biggest thing that I would look at is your own net worth. If your overall net worth is less than one million dollars, is there any sense in covering yourself for an additional million over and above your regular policies? I would think not.
Another factor to consider is your daily routine and lifestyle. Does your job, hobbies, or your place of residence put you at any increased risk for a catastrophe?
Lastly, consider what level of peace of mind you feel that you need? If this is important to you, then maybe you’d want to consider getting a policy.
Personally, at this point in my life, I doubt that an umbrella insurance policy would be right for me. My net worth is not at a level where having one would be prudent, and I just don’t think I have some of the liability factors needed to warrant a policy. If I had a pool in the backyard, or a small business doing something like construction, or teenaged children, I might consider it.
But, at least it’s good to know what the policy is and what it covers. What are your thoughts? Do you think it’s right for you?
(photo credit: protectorr)