The term "umbrella insurance" may conjure images of the logo of the Travelers insurance company for those unfamiliar with the insurance industry, but umbrella insurance is actually a common type of insurance policy offered by many different insurance companies. Understanding how umbrella insurance works, as well as its benefits and drawbacks, can help you decide whether you should have an umbrella insurance policy.
Umbrella Insurance Basics
Umbrella insurance (also called excess liability insurance) protects the policyholder against personal liabilities that exceed the liability coverage of other insurance policies. For instance, if you crash into someone else and destroy his luxury vehicle, umbrella coverage could pay for damages he wins against you in a lawsuit that exceeds your auto liability coverage. According to Geico, umbrella insurance can protect you from having to pay for injuries such as damage to property and lawsuits. For example, if neighbor child plays in your yard, trips and breaks his leg, his parents might attempt to sue you. Umbrella insurance could pay for damages awarded against you in the lawsuit.
The primary benefit of carrying umbrella insurance is that it can pay for unexpected liabilities and protect your assets against lawsuits. Civil lawsuits can result in large judgments that can lead to financial ruin. For instance, if you have carefully saved $500,000 for retirement over your working life but you injure a businessman in a car accident that prevents him from working, he could pursue a judgment against you for hundreds of thousands of dollars. An umbrella insurance policy can protect your wealth from such unforeseeable events.
The primary drawback of umbrella insurance is that you must pay a fee or premium to buy a policy. The cost of an umbrella insurance policy will vary depending on the limits of the plan and relevant risk factors, such as where you live and the types of cars you own.
Whether you should carry umbrella insurance or not is ultimately a personal decision, but those with more assets may benefit more from umbrella coverage than those with fewer assets. According to the New York Times, many wealthy people buy umbrella insurance policies with limits of $5 million or more to protect their wealth. The fewer assets you have, the less you have to lose when facing a lawsuit. If you have no assets, others will have little to gain from bringing a lawsuit against you, so it may not be worth buying umbrella insurance.