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Pat and Sandra (not their real names) were ecstatic to see their youngest child off to college. Evan was going to live on campus and didn’t need a car, so they took him off their auto policy. With college bills coming in, saving where they could on insurance premiums seemed like a prudent financial decision.
Evan took up blogging, posting witty (to him) commentaries about his classmates. He enjoyed the attention he got from the blogs — until one of his targets slapped him with a personal injury lawsuit for libel.
You can imagine Pat and Sandra’s shock and dismay when they learned about their son’s blogging and the lawsuit. Their horror grew as they learned they were named as co-defendants in the suit because they still claimed Evan as a dependent.
If only they had kept him listed on their insurance policy, their umbrella liability insurance would have protected them, covering the settlement amount and even the defense costs.
What is umbrella insurance?
Umbrella insurance, which is also called excess liability insurance, is the relatively cheap insurance that protects you against a host of circumstances that could wipe out your current and future savings. This insurance kicks in to protect you should something cost more than the limits on your underlying auto or homeowners liability coverage (and includes coverage for personal injury claims, even if they are unrelated to auto or home). Considering that personal injury settlements and awards exceed $1 million at least 13% of the time, don’t assume you won’t ever need the extra coverage.
Types of events covered
You can imagine how one of the following events could happen quickly — and cost a lot more than your limits on your auto and homeowners or renters policies:
• Your dog, Fluffy, bites the neighbor’s kid.
• Your spouse gets into a car accident, injuring a cardiologist who can no longer perform surgery.
• Your teenager posts something libelous on Facebook, Twitter or Snapchat.
• Your back deck collapses under 12 of your friends at your annual summer barbecue.
Umbrella insurance protects you against circumstances like these that are unlikely but possible. And if they do happen, they can wipe you out. The good news is the insurance coverage is relatively inexpensive, making it affordable for you to have a plan that’s better than “I hope I won’t ever need this.”
What does umbrella coverage provide?
Umbrella insurance will provide you with the resources you need to fight a liability claim against you or your family members. Generally, this includes:
• Property damage and bodily injury amounts
• Personal injury amounts
• Defense costs
• Optional: Excess under/uninsured motorist coverage, which protects you if you are injured by someone with no or insufficient insurance
Some policies even provide money to pay for public relations to help protect or repair your reputation.
The biggest reason that most people carry this insurance is for the help and support it provides in mounting a legal defense should they be sued. Even flimsy cases can take many months to resolve, during which time you can be subject to an amazing amount of stress. Umbrella liability coverage takes much of this financial burden off of your shoulders.
How much coverage do you need?
Umbrella insurance is sold in increments of $1 million. Premiums go for around $200 a year per $1 million of coverage. As a rough rule of thumb, the starting point is to get as much coverage as your net worth. If your net worth isn’t high but you have a high-wage job, keep in mind the possible need to protect your future wages; lawsuits can and do garnish wages. Some assets are going to be protected from judgments, such as retirement savings in 401(k) or other pension and health plans. But exactly what is protected varies greatly from state to state.
Be careful to ensure there is no gap between the upper limits on your auto and homeowners insurance policies and the starting point of your umbrella coverage. Many policy types have different costs, provisions, terms and limits of coverage.
Do your homework to compare policies, and consider working with a broker. One way to offset the cost of umbrella coverage is to increase your deductibles for homeowners and auto insurance policies, thereby decreasing those premiums.
According to a study in 2013 by Consumer Reports, only 10% of homeowners carry excess liability coverage, so clearly this is an area a lot of people have overlooked. For more areas of your financial security that you may be neglecting, check out this free guide.
It’s worth repeating: Don’t let the unexpected wipe you out, especially when the insurance to protect yourself is so affordable. No one is immune from the unexpected and unlikely events of life. Having appropriate insurance can give you peace of mind in addition to important financial protection.
This article also appears on Nasdaq.
Image via iStock.