An umbrella policy protects you more than your standard liability insurance. It’s not necessary for everyone, though. Learn if it’s worth having an umbrella policy or not.
Liability insurance doesn’t always cover 100% of the financial liability your errors cause. Even though you pay a decent premium for the coverage, without an umbrella policy you may find yourself on the hook for thousands of dollars.
For example, you cause a major car accident and cause $500,000 in damages, but you only have $250,000 liability insurance. The other party sues you for the difference in cost, leaving you with a huge financial liability.
Is it worth having an umbrella policy? We answer the question below.
What is an Umbrella Policy?
Think of an umbrella – it protects you from all sides, right? That’s what an umbrella policy does. It covers the loopholes or excess that your liability insurance doesn’t cover.
No one can predict how bad the damages will be in an accident that occurred with your car or at your home. If the financial costs exceed your liability coverage, you’re on the hook unless you have an umbrella policy that picks up the slack.
What does an Umbrella Policy Cover?
An umbrella policy covers you and your household members from a variety of financial issues including lawsuits, the financial costs of damages to people or property, and sometimes liabilities of being a landlord or getting sued for defamation.
Umbrella insurance policies usually cover the difference between what your current liability insurance (car or home) covers and the actual costs, but up to your insurance limit. Umbrella policies also cover the legal costs that you incur as a result of the damages.
What does an Umbrella Policy not Cover?
Umbrella policies don’t cover any damages that occur to you personally or your property. Your auto, home, or health insurance cover those damages. Personal umbrella policies also don’t cover any business-related insurance losses.
Umbrella policies also don’t cover any intentional damages (such as occur from crime) or any losses occurring from your own breach of contract.
Check with your policy to see if they cover boat-related losses too, as many policies exclude it.
Who Benefits from an Umbrella Policy?
Anyone with a net worth that’s higher than their liability limit on their home or auto insurance benefits from an umbrella policy.
For example, if your net worth is $1 million and you have $500,000 in liability insurance, you put your assets at risk. If the victims sue you for damages, you could lose your net worth paying for the damages. An umbrella policy protects your net worth by making up the difference and covering your legal costs.
So is it worth having an umbrella policy? It depends. If you have more assets than your liability insurance is worth, then yes. It protects you from lawsuits and losing your net worth. If you don’t have assets beyond your liability coverage, you may not need it unless you want coverage against crazy lawsuits (people can sue for anything today) and will sleep better at night knowing you have coverage.