Don’t be a sitting duck
As a home and car owner, you maintain home and auto insurance to protect from losses if something goes wrong. But what happens if something really goes wrong? If your policy doesn’t cover the loss, you may have to deplete savings, retirement accounts or worse yet sell your home.
You may wonder what “really wrong” looks like. Consider the following scenarios:
- Your teenager causes a car accident that injures several people
- A neighborhood kid wipes out and incurs injury in your front yard while trick or treating
- Your renter has a friend over who slips and falls on your rental property
- You bake your favorite dish for a community event which causes food poisoning for all who partake
The big threat in each of these scenarios is your financial liability exceeding your policy limits. This can occur if the other person’s medical expenses are high or a lawsuit is filed against you.
How it Works
Let’s look at an example. Your auto policy has a bodily injury limit of $300k per accident. You cause a 3 car pileup and are sued for $450k. Your personal obligation is $150k. But what if the lawsuit awards the other drivers $700k? You then have to cover $400k from your personal assets.
How Much Do You Need
A simple solution is umbrella insurance. The most common amount of coverage is $1-3 million, although larger policies are available. Most financial planners recommend getting an amount equal to your net worth. An umbrella policy kicks in once your home or auto policy is maxed out. So in the previous example, the umbrella policy would cover the $150k or $400k liability. An important note: your auto policy must be the maximum 100/300/100 in order to avoid a gap in coverage. Umbrella coverage begins above these limits.
How Much Does it Cost
You may be thinking, “But the likelihood of a devastating situation is low and insurance is expensive.” Both can be true. The good news is that umbrella is less costly than other types of insurance. It’s not uncommon to see policies for $1-2 million costing under $1500 per year. Your insurance provider can give you a quote. Most often the umbrella policy is grouped with your home and auto policies but you may find an insurer who offers just umbrella coverage.
As you shop for a policy, consider how much you have in assets and home equity. The umbrella should cover those assets to safeguard your nest egg.
When Should You Get Coverage
The final question is “when should I get an umbrella policy?” Easy answer. Right away! You may be declined if your teenage driver racks up a couple of tickets. And a devastating blow could occur at any time. The process of obtaining umbrella insurance is quick, simple and low cost.