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What is an umbrella policy?


What are the odds that someone who trips and falls down your front steps will sue for anything less than several hundred thousand dollars? Does “slim to none” come to mind?

This is why it has become increasingly important for everyone to consider adding on what is known as a “personal umbrella” to your insurance coverage. While “umbrella” may seem a strange name for an insurance policy, it’s actually fairly descriptive of the intent. This policy provides coverage that creates an “umbrella” of liability protection above of all of your other personal liability policies.

For example, let’s say you purchase an umbrella policy with a $1 million limit. Your current personal auto insurance policy has limits for liability claims of $300,000. If any auto claim exceeds a total of $300,000, the umbrella policy now begins covering that same claim for up to an additional $1 million. In effect, you now have $1.3 million of auto liability coverage!

The same applies for the liability limits of your homeowners, personal watercraft, aircraft or any other personal policies you list on the umbrella policy. These are described in the umbrella policy as “underlying” policies. Since the umbrella is designed to be additional insurance, and not replace your basic coverage needs, the insurance carrier writing the umbrella policy is going to require you to first purchase the underlying policies that you need (you won’t be required to buy watercraft insurance if you don’t own a boat!) and to have certain liability limits on each. This is simply to prevent folks from dropping all of their other liability insurance and just letting the umbrella cover all their claims.

(Note: An umbrella policy can be distinguished by an excess policy in that the excess policy will often not cover any types of losses that are not covered by your underlying policies. It will typically only increase your limits. The umbrella policy, on the other hand, may cover many types of claims not covered by your underlying policies. For that reason, a true umbrella may be somewhat more expensive than a pure excess policy, but well worth the additional cost.)

Do you really need such high limits of liability coverage? Unfortunately, the answer is almost a definitive “yes.” I say “almost” because it is possible you will never be threatened with a lawsuit or have someone either injured at your home or ever hurt someone with your boat or car.

But the odds are that will happen at least once in your life, and for that one time the extra coverage provided by the umbrella will more than repay you for the premiums you’ve invested over the years. And since the umbrella is designed to kick in primarily for large claims, the price of the policy is fairly low considering the amount of coverage it will give you.

Keep two things in mind when purchasing such coverage. First, these policies are only for liability insurance, and are not designed to provide coverage for damage to your own car, home, boat or aircraft. Second, umbrella policies are unique to each insurance company, so be sure to talk with your agent about what coverages are included, as well as what limitations or exclusions may adversely affect your personal situation (a business exclusion when you have a real estate office in your home, for example).

Umbrellas are a valuable addition to your insurance plan, and one policy that is truly designed to save for a rainy day.

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