Umbrella insurance is extra liability insurance that you purchase in addition to your regular insurance policies. As its name implies, umbrella insurance sits "on top of" your other insurance policies like an umbrella, to provide added financial protection in the event that other policies cannot cover the loss.
For example, let's say that you rear-end a luxury vehicle, and it turns out that you must pay far more than your insurance coverage allows. If you don't have an umbrella insurance policy, you'll need to figure out where to get that money. But if you do have umbrella insurance, then that policy would kick in and you would likely pay nothing out of pocket.
It used to be that only the very wealthy needed umbrella insurance. But anyone can be sued for any reason at any time, and umbrella insurance provides added protection against losses. If someone falls on your front steps or your tree falls on a neighbor's house during a storm, they can successfully sue you for damages. Anything that happens on your property or because of your property is fair game and not always covered by traditional homeowners' insurance. Umbrella policies provide protection in many situations that usual liability policies don't cover.
While being wealthy isn't a prerequisite for needing umbrella insurance, most people who fall into this category need it. Obviously, the more money you have, the more of a target you become for lawsuits, and the more you have to protect. Financial expert Dave Ramsey highly recommends umbrella insurance to anyone with more than $200k in assets.
An umbrella insurance policy limit is how much money that insurance carrier covers, or the maximum amount of protection offered. Basic insurance, such as auto and homeowners' coverage, usually has policy limits in line with the value of that particular asset. An umbrella insurance policy has much higher coverage.
Policy limits vary widely across individuals, needs, and insurance carriers. Policy limits are part of your initial agreement with an insurance carrier. For example, based on the value of your home and the risk you incur as a typical homeowner, you may have liability insurance coverage up to $300,000 (the policy limit). If a settlement or judgment against you goes beyond that amount, your insurance company will not be held responsible, and you will be required to cover the remainder personally. Umbrella insurance provides added protection because it will pay beyond your basic insurance policy limits.
But every umbrella insurance policy has a limit. When you sit down with your umbrella insurance company, you will be asked to detail your assets, risks, and other insurance policies to determine your umbrella policy limits. Of these details, your risk carries the most weight. Do you live in a wealthy part of town and affect the lives of many people? Do you own property on which others may become easily injured, such as a bar or an ice-skating rink? These details will play a significant role in determining your umbrella policy limits.
People who run a greater risk of being sued may need an umbrella policy limit of $5 million or more.
Last Updated: 08/20/2013
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