When does it make sense to have umbrella insurance?

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You likely know many of the ways to potentially build wealth — invest in a retirement plan, buy a home, have a savings strategy, and keep track of long and short-term financial goals. But how much thought have you given how to protect your money?

Even if you think it could never happen to you, financial risks, such as a lawsuit, are a hypothetical what-if that may be worth imagining. An umbrella policy is one tool that can potentially protect your assets.

What is an umbrella policy?

An umbrella policy isn’t a popular financial topic like budgeting and investing. Most people have never heard about an umbrella policy. Simply put, an umbrella policy is just as it sounds. It’s a secondary policy of excess liability that acts as an umbrella on top of insurance policies you already own, such as your car, homeowner’s, or renter’s insurance. Because these policies have limits, they may not fully cover a catastrophic event, like a car accident or extensive property damage. An umbrella policy can be tapped to pay the difference between the limit of the primary insurance and any claims, so your personal assets aren’t affected.

If you’ve got assets, it may be a good idea to think about adding an umbrella policy to your insurance portfolio to protect from liability exposure in the event you were sued for something happening on your property or if you cause injury to someone else. Most experts suggest considering an umbrella policy if your assets exceed the amount of liability coverage on your car and homeowner’s insurance.

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When do you need an umbrella policy?

An umbrella policy typically comes into play in one of two ways: Either the limit of your primary car, homeowner, boat or other insurance isn’t sufficient to cover a claim, or the insurance options you do have don’t apply to the situation, such as a lawsuit filed against you.

There are lots of reasons why you should think about an umbrella policy and what one covers:

  • Bodily damage from an at-fault car accident. Of course, your car insurance would provide a benefit to the injured party, but up to certain limits. For instance, if their medical bills totaled $450,000 and your car insurance only covered $300,000, you’d be left to pay the difference. However, if you had a $1,000,000 umbrella policy, it would provide the extra $150,000 you needed to cover the liability gap.
  • Property damage to someone else’s house or stuff. Your child goes Kandinsky on a museum Monet. Your dog pees on your neighbor’s mid-century modern couch. You rent a boat and damage a pier on vacation. Whatever the incident is, an umbrella policy can provide additional coverage.
  • Covers legal fees and court costs in the event you were sued. An umbrella policy can be used in the event you were sued for a host of reasons. This applies to libel or slander cases as well — for instance, you say something negative about an acquaintance on social media or defame their character, an umbrella policy could likely cover the cost of an attorney for you.
  • Bodily damage to someone else. Of course, you’re not intending to hurt anyone, but accidents happen, and umbrella insurance can be tapped for things including dog bites and slips and falls around your home and property. It can be smart to look at the liability limitations for your home or renter’s insurance to know what is and isn’t covered under that policy to help you assess how much umbrella insurance you may need.

Unlike life insurance or disability insurance, an umbrella insurance policy usually covers more than the individual named on the policy. An umbrella policy usually covers your spouse, any relatives or dependents who reside with you, as well as anyone who may borrow your car, including a friend. Common exclusions on an umbrella policy may include not covering injuries that occur to yourself, personal property damage, or intentional or criminal acts. Reading the fine print on the policy to know exactly who and what may be covered can help give you peace of mind.

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Where to start looking for an umbrella insurance policy

Often, the easiest place to begin your search for an umbrella policy is through the same company as your car or homeowner insurance. You may also be able to bundle the policy with your existing policies as well, which can simplify the bill paying process and may give you an option for a discount.

How much will you pay for your umbrella insurance policy? That depends, but these policies can be relatively inexpensive compared to other insurance coverage. Umbrella policies are usually sold in increments of $1,000,000, and rate quotes depend on factors including your current home and auto coverage and your exposure to risk.

As with any insurance policy, it can be a good idea to compare quotes and choose the plan that makes the most financial and practical sense for you and your family.

Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER®  professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money. Opinions expressed by the author are their own.

Haven Life doesn’t provide tax, legal or investment advice. This discussion is intended as general education only. We encourage you to work with your own personal tax or legal professionals and your financial advisor. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

Haven Term is a Term Life Insurance Policy (ICC15DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Not all riders are available in all states. Our Agency license number in California is 0K71922 and in Arkansas, 100139527.

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