Does an Umbrella Policy Make Sense?

shutterstock_185977205Have you ever heard of an umbrella policy? Or has your current insurance company reached out to you and offered one? Because depending on your needs and life situation, an umbrella policy could make very good sense for you.

First Things First – What is an Umbrella Policy?

An umbrella policy is an addendum to your current insurance. For homeowners and drivers, it’s usually offered when you have both your homeowner’s and auto insurance policies with the same company. For a fairly reasonable fee, they offer “umbrella” protection that extends the liability coverage of both to a certain dollar amount – usually a million dollars.

What this does is it protects you and your family in case you are liable, and get sued for an amount larger than your liability coverage.

To give a clearer example, let’s look at Harry. Harry has a home and a car, and is insured by ABC insurance for both. His policy limits in terms of liability are $250,000 for the house, and $100,000 for the car. So if Harry gets into a car accident and hurts someone or damages property, he’s covered for up to $100,000 in a lawsuit. For the house, if someone falls or gets hurt in his home or on his property, he’s covered for up to $250,000.

Any lawsuit / award over the above limits come out of Harry’s pocket. Or, more likely, will force him to lose his home, especially in the case of a bad accident.

What an umbrella policy does is it covers both the home and auto liability in a million-dollar umbrella. So if Harry got sued for $500,000, his homeowner’s insurance will cover the first $250,000, and the umbrella policy will cover the rest. Make sense?

As I mentioned, most umbrella policies are for a million dollars, and, in my opinion, that number was reached as that’s probably a good limit for the average person. When lawsuits are filed, the ability to pay is often factored in – in other words, it’s pointless to sue an average person for $50 million dollars. $500,000 is far more likely.

Who Needs an Umbrella Policy?

In my opinion, anyone who owns a home or property they want to protect, and also has their auto and homeowners insurance under the same carrier. This is because they can almost always extend the liability coverage to that million dollar threshold for a very modest fee. Of course, how much the fee is will depend on your circumstance – if you have a hot-rodding 17 year old on your policy, it’s probably going to be higher than if you were Driving Miss Daisy.

But all in all, an umbrella policy can make good sense, and I urge you to check it out.