Last year, I served jury duty in a case that involved a person who was injured in a car accident. Given the extent of the injuries, the man who caused the accident was ordered to pay $400,000 to the injured party. I later found out that his auto insurance liability coverage was capped at $250,000, so he was responsible for paying an additional $150,000 out of pocket. Had the at-fault driver owned an umbrella insurance policy, the extra money would have been covered.
An umbrella policy is basically insurance for your insurance. For instance, if you were charged with a lawsuit that exceeds the coverage on your renters’/homeowners’ or auto liability insurance, the umbrella policy would act as a safety net and cover the difference if the settlement exceeds the home or auto liability limit.
A typical auto or homeowners’ policy includes $300,000 liability. Many people see these large dollar amounts and assume they are secure for just about any potential catastrophe. While it is uncommon that a lawsuit exceeds these amounts, the cost of injuries in an accident is always unpredictable. That’s where umbrella policies come in: most of them cover $1 million, although you can buy policies up to $5,000,000 or more.
Because we rarely need to tap into umbrella policy coverage, they are very inexpensive. That’s why I call them the best deal in insurance. They typically cost about $10-$15 a month in premiums.
Considering the affordability and the extensive coverage of umbrella policies, I believe they are a no-brainer for most households. And while most people will never need to fall back on one in their lifetime, an umbrella policy could be the difference between a comfortable life and financial disaster.