Umbrella Policies: Good Deal

Submitted by Sterling Raskie on Thursday, May 1, 2014 - 12:00pm
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Is a personal liability umbrella policy worth the price? Generally, yes. The price remains reasonable even as the expense of just minor accidents continues to skyrocket.

Personal liability umbrella policies cover above and beyond the underlying liability limits on your auto or homeowner’s insurance. You can also buy umbrella policies if you hold renter’s insurance or condo policies.

According to the carrier Geico, umbrella insurance covers bodily injuries (medical bills and liability claims resulting from injuries due to an auto accident that’s your fault, for example) and property damage (such as to vehicles and other property that are your fault). You’re also covered if sued for slander or libel or false arrest, among other personal liabilities.

Umbrella liability usually comes in increments of $1 million. Most people buy the coverage through their carrier for auto or home insurance. That carrier usually requires that in an underlying auto policy the personal liability of the policy be at least a specific amount, often $250,000 or higher.

Likewise with a home policy: The insurer requires the liability reach at least a certain amount, often $300,000 or higher.

The umbrella policy pays after accidents and liability exhaust the above amounts. If you’re liable for an auto accident or an accident at your home (trampoline injuries and pool mishaps are common), the insurance company pays from your auto or home policy first; damages left over then come from your umbrella policy.

For example, suppose driver Danny crosses the center line and hits another car head-on. All three passengers in the other car sustain serious injuries totaling $750,000 in liability. Danny’s auto policy pays $250,000 of bodily injury per person and $500,000 total per accident.

Danny’s policy covers $500,000 of the damages and then runs out. If Danny lacks umbrella coverage, he pays the remaining $250,000 and might suffer wage garnishment or seizure of assets, among other drawn-out collection scenarios that make for a bad life.

Luckily, Danny carries $1 million in umbrella coverage, which takes care of the remaining $250,000 – including any legal defense. Umbrella coverage makes sure he gets just a bad day.

Umbrella policies may also cover your liability even if an accident didn’t occur under circumstances that engage your auto or home policies. Typically, umbrella policies pay after you pay a self-insured retention (deductible) of some $1,000 to $5,000.

Prices for umbrella coverage are reasonable and fluctuate based on such factors as risk exposure. For example, a single person with one car, one home and no moving violations or at-fault accidents pays about $150 to $200 in premiums annually. A couple with two cars, a home, a boat, all-terrain vehicles and teenage drivers pays much more because of the increased risk, maybe $500 to $750 annually.

Why so cheap? The underlying insurance requirement on umbrella policies must be high; rarely do claims exceed these amounts and trigger umbrella benefits. Insurance companies know the low percentage of umbrella policies that pay and that these policies are, for them, cash cows.

Is umbrella coverage a good idea? Yes. If the worst happens, do you want a bad day or a bad life?

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Sterling Raskie, MSFS, MBA, CFP, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is an adjunct professor teaching courses in math, finance, insurance and investments. His blog is Getting Your Financial Ducks in a Row, where he writes regularly about investments, retirement savings and financial planning.

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