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What is an umbrella policy? Do I need one?

What is an umbrella policy?

What’s an umbrella policy?

It is a liability policy that places an additional layer of liability protection over and above all your existing insurance policies. They can also be known as excess liability policies. Umbrella policies come in increments of $1 million dollars. Do not let the large number scare you as umbrella policies are generally very affordable.  The affordability comes from the fact that the umbrella is only used after you have exhausted your liability insurance that is in place on your standard personal lines policy.  Your base policy works like a layer of insulation before the umbrella policy would need to be used.

How does an umbrella policy work?

Yes, there is a method to the madness.

Umbrella policies are normally standalone policies that place an umbrella of protection over all your assets. Generally, items cannot be excluded from an umbrella policy. You cannot say, “don’t cover my cars, or rental home, or motorcycle.” The umbrella requires you to cover all your assets.

A good example would be if you own an ATV that you use for recreation, that ATV would have to be covered under a personal policy first for you to qualify for an umbrella. A boat would be another good example. At a minimum, the boat would have to have a liability policy before a company would allow you to apply for an Umbrella policy.

Most insurance companies will require you to carry a certain level of liability insurance before they will allow you to purchase an umbrella policy.  This is also a way for them to keep rates down.  They know that your personal policy will cover most claims with the exception of a potentially catastrophic claim.  That is the intended use of umbrella policies, to protect you from a catastrophic liability claim.

There are personal umbrellas for private individuals and commercial umbrellas for business owners.  On occasion I run into a person that thinks their umbrella will do it all, whether or not it is for personal use or business use and that is not the case.

Why do I need an umbrella policy?

Different factors drive the need for an umbrella policy. The measure I use most of the time is assets. Insurance is there to protect your assets from lawsuits. I am shocked at how many agents never cover the subject with potential clients.

While there are more than three, I generally suggest umbrella policies for three reasons:

  1. You have youthful drivers.

Like it or not, young drivers increase your risk of a lawsuit against you. I own a young driver and am lucky that he is a very courteous driver. If they should have an accident with someone, it is your assets that are at risk. Depending on the level of your assets, you may need the additional coverage that an umbrella provides above your base policy’s liability limits. Accidents happen and I do not want an accident that is my child’s fault to potentially bankrupt me.

  1. You are rich 😊!

What is the definition of rich in this example? You have assets in an amount that are greater than the base limits on your home or auto policy. The first key is to make sure your home and auto policies have the correct limits. Most new clients have never had this conversation framed in this way. Your insurance is there to protect your assets. Most agents never even ask their clients about their asset level. So how do those agents protect you? Simply put, they don’t! Look at the value of your home, land, cars, bank accounts, investments, trusts, and so on……… Clients always say, “well, I am not rich. Then we add up their assets to change their perspective. Most people come to me with $100,000 in liability coverage or less. If you have a home and a car, you are already over that amount.

  1. You are approaching retirement.

You have worked hard to get what you have in life. Let us make sure that your insurance is set to protect you. Most of the time, an umbrella policy is part of the solution to do that. Just like the example above, the goal is to protect your assets. Both of my parents are 81 years old. They are good drivers, however, driving is their largest exposure to a claim. With an umbrella policy, my confidence is higher that they will be protected from a lawsuit that may occur during an auto accident.

For me, an Umbrella policy is necessary when the level of protection needed, is greater than the base limits your personal insurance can provide. Pair that with there being a part of the equation that puts you at above-average risk. i.e., youthful driver, retirement/age, level of assets, which shows the need for an umbrella. The cost of umbrella policies over all are generally affordable. The issue is that not enough agents protect their client’s assets.

Note: Umbrella policies may or may not cover Un- and Underinsured motorist coverage. Please make sure to clarify with your agent.