As an insurance agent, I have been asked numerous times something like the following: “Well, I have an umbrella policy, so it should be covered, right?” or, “If my house burns down and I don’t have enough coverage, my umbrella will cover it, right?”
The perception is that if you buy an umbrella policy, it acts like the “Get Out of Jail Free” card in Monopoly: If something happens that isn’t covered somewhere else, you can pull your umbrella policy out of your sleeve and make things all better. Unfortunately it doesn’t work this way. An umbrella policy is great, and inexpensive, and everyone should have one. However it is not a magic wand that, once waived, can solve all of your insurance problems. So let’s take a closer look.
An umbrella policy is an extra layer of liability insurance that helps protect you and your assets from major claims and lawsuits. Umbrella coverage is optional—but it’s a very smart option to have in place. A typical umbrella policy can cover anywhere from $1 million to $5 million in claims.
First, let’s see what an umbrella policy will not do:
- An umbrella policy does not cover your property. If your house burns to the ground and you don’t have enough coverage—or somehow don’t have any coverage—you could have a $50 million umbrella policy and it won’t do a thing to help rebuild your house.
- An umbrella does not fill in the gaps if you are underinsured. You cannot buy an auto policy with state minimum limits and then buy an umbrella policy in order to automatically have more than $1 million of coverage. Umbrella policies will not kick in until the underlying auto or home limits are used up. Subsequently, insurance companies require that you carry higher limits: $100,000 or $250,000 limits on your auto and $300,000 or $500,000 on your home before you can use an umbrella policy.
- Generally speaking, an umbrella will not cover a claim that your other policy will not cover. There are potential exceptions to this rule. However, for the most part, if a claim is not covered by your home or auto policy, it is not covered by your umbrella policy either.
Here is what an umbrella policy will do:
- An umbrella policy provides liability coverage only. As the name implies, it goes over your other insurance—home, auto, vacation home, rental property and boat, to name a few.
- It provides you with a high limit of liability coverage at an inexpensive price. If someone offered you $1 million in exchange for $250, you would think they are scamming you. Yet, that is essentially the tradeoff when you buy an umbrella. For around $250 a year, you can have a $1 million umbrella.
So who should have an umbrella policy?
The answer, really, is everyone. These policies are generally very inexpensive and provide a significant upgrade in coverage. The people who really should consider umbrellas are those with young drivers on their auto policy and/or those who own rental properties in their personal name. I have personally seen two instances in which a young driver has had an accident and the claim surpassed the limits on the auto policy. In both cases, the parents had “good” auto coverage limits. If you are a landlord and your tenant slips and falls at your property, he or she can easily sue you for more than the limit on your rental property policy.
How big of an umbrella should you get?
That is the million dollar question. Or five million dollar question. There is really not a one-size-fits-all answer to this. Look at your assets—home, car, 401(k), annual income, investments—and add them all up. Whatever you come up with, that is a good starting point, because those are the things people can go after if your limits aren’t enough to pay for a claim. The minimum umbrella is $1 million, and most companies will offer up to $5 million before referring you to an underwriter for approval.
When should you get an umbrella?
Right now is a good time. These policies are inexpensive and will provide quite a bit of peace of mind, even if it’s not a “Get Out of Jail Free” card. And really, how can you put a price tag on peace of mind?