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Umbrella liability insurance is named because it acts like an umbrella, sitting on top of your auto and homeowners liability policies to provide extra protection.
(Even if you don't own a home, remember that you still need renters insurance to cover both your liability and your personal property). Some examples of where umbrella coverage often comes into play:
An auto accident in which you are sued under your auto insurance policy.
Your neighbor slips and falls on your property, and you are sued under your homeowners insurance.
A natural disaster in which another person's property is damaged by, say, a tree on your property crashing down on their vehicle or home. This usually falls into the, "I thought that was covered by my homeowners policy" category
Your auto and homeowners policies have at least some liability insurance that would be used to settle legal claims. But what if a settlement (or judgment, if it goes to court) is $800,000 and you only have $300,000 of liability insurance? The insurer would pay its $300,000, but where are you going to get the other $500,000? Virtually everything you own would be fair game to pay off the debt.
Worried? You should be. With Americas love affair with lawsuits, you can't afford to not have umbrella liability insurance.
Umbrella liability insurance pays $1 million, $2 million and sometimes even $5 million or more of a claim, on top of what your basic policies will pay. You are usually able to set the amount. For the protection you get, umbrella liability coverage is not very expensive. Premiums are usually $200 to $300 a year for $1 million worth of coverage.
The cost depends on such criteria as the amount of coverage, the insurance company issuing the policy and your own "personal risk factors" (such as the number of traffic tickets you have gotten in the past few years, and possibly your credit report).
When people do buy, they often don't buy enough. For example, you may have assets worth $1 million, figure that you need enough coverage to protect your assets, and therefore buy a $1 million policy. But what if a judgment of $2 million is handed down? We often hear of juries awarding $20 million; it should be obvious that the amount of someones assets isnt taken into consideration. In either of these cases, you would lose all of your assets and still owe money. Your future income, if you have to make settlement payments over time, could easily be jeopardized. The same goes for any inheritance you may receive (it could easily be seized for payment), not to mention any inheritance you may want to leave your children.
How much you own is irrelevant when deciding how much to purchase.
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