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Use Umbrella Insurance to Protect Your Family And Assets

Few people would ever consider skimping on their homeowners or auto insurance. But while these policies are a good insurance foundation, they may not be enough for the average family. Many folks, and especially those who've accumulated any level of assets, will find it prudent to add an excess liability policy, sometimes referred to as an "umbrella" policy, to their insurance coverage.

What's an umbrella policy?

An umbrella policy provides an extra layer of insurance that comes into play once your homeowners or auto insurance policy limits have been reached. Say a guest is injured tripping on your stairs, a driver in your house is at fault in an automobile accident or your dog bites a neighbor's child. In addition to medical and repair expenses, these events could lead to a lawsuit that could quickly exhaust your regular homeowners or auto coverage.

While every policy differs, most umbrella policies cover injuries to other parties, including guests in your house or other motorists.

Even if you prevail in a legal proceeding, you'd likely run up a costly bill. Lose, and a settlement could wipe out your home and other assets - even a portion of your future earnings.

Of course, you could simply boost the coverage limits on your auto or homeowners insurance, but that would likely cost you more money. Most umbrella policies cover incidents involving either your home or automobile. In addition, many cover claims that often fall outside other policies' coverage. An umbrella policy could cover, for example, a lawsuit for slander resulting from an offhand comment made at a neighborhood gathering.

What's covered? What's not?

When a loss occurs, the first insurance policy against which claims will be made typically will be your primary auto or homeowners policy. Once that coverage is exhausted, the umbrella policy generally kicks in.

While every policy differs, most umbrella policies cover injuries to other parties, including guests in your house or other motorists. Many also cover damage to property, including your vehicles, homes and other items. Finally, umbrella policies usually cover the cost of defending yourself in a lawsuit, and any settlements or payouts that result.

All the same, an umbrella isn't a blank check. For starters, many don't cover business incidents. If you operate a home-based business, you'll want to consider obtaining coverage separately. Similarly, few umbrella policies automatically cover employees on your property, such as cleaning people or child care providers.

How much coverage do you need?

When calculating the needed amount of coverage, consider several factors:

  1. Your net worth. The higher this is, the more coverage you'll want.
  2. The number and ages of drivers in your household. Not surprisingly, if you have several drivers, particularly if they're younger, go for more coverage.
  3. You possess items that might attract lawsuits. If you have a backyard swimming pool, for instance, consider boosting the amount of coverage.
Many umbrella policies offer coverage starting at $1 million, and increase from there. Before assuming that $1 million is an adequate amount of coverage, tally the value of your assets, including your home, personal possessions and investments. You may find that your total is considerably over $1 million. What's more, a settlement from a lawsuit could exceed your net worth. As a result, a higher level of coverage may be prudent.

When you've determined an appropriate level of coverage, review it every year or two. Why?

Because, as the value of your assets changes, your coverage should follow accordingly.

How much will it cost?

Fortunately, many umbrella policies are relatively inexpensive. In some cases, a $1 million policy may only cost several hundred dollars annually. Premiums can vary, based on the amount of primary insurance coverage you have, where you live, and your driving record and credit history.

It typically makes sense to purchase an excess liability policy from the company that issued your homeowners and auto insurance policies. Most insurers offer discounts for purchasing multiple policies. In addition, buying the policies together will make it easier for you to coordinate coverage.

Avoid a devastating loss

Just about everyone should consider his or her need for an umbrella insurance policy. In many cases, such policies can be relatively inexpensive. On the other hand, while the lawsuits they protect against aren't all that common, when they do occur, the costs can be devastating. An excess liability (or umbrella) policy can help you avoid financial ruin.

Source: Zinner & Co. LLP
focus Newsletter
april/may 2012