All About Umbrella Insurance

September 02, 2010, By Steve Thompson 1 comment

When you walk outside your house during a rainstorm without an umbrella, you get clobbered by the elements. The same principle applies to umbrella insurance—without it, you're likely to get clobbered financially in the event of a catastrophe.

Underneath the Umbrella

The purpose of umbrella insurance is to provide a blanket of security for your assets. It is called "umbrella insurance" because it hovers over more than one insurance policy, such as auto insurance and homeowner's or renter's insurance. Rather than covering deficiencies in just one policy, it can save the day in claims on any policy.

Although homeowner's and car insurance are the two types of policies most frequently covered by umbrella insurance, you could use it for any type of policy. Talk to your insurance agent about your options.

For example, let's say you have $30,000 of liability insurance on your 10-year-old SUV. Then, in a freak accident you rear-end a luxury sedan on your way to work, totaling a vehicle worth more than $50,000. Your $30,000 liability coverage is not going to bail you out of that jam.

If you had a $1 million umbrella insurance policy covering home and auto, however, that policy would cover the difference between what your car insurance pays and what the car you totaled is worth. Otherwise, you would have to pay $20,000 out of pocket, something the average guy wouldn't be able to swing.

Buying an Umbrella Policy

Umbrella insurance is often considered extravagant because it is sold in increments of $1 million. Who needs $1 million worth of coverage? You've never even seen $1 million!

The reality is that accidents and natural disasters can produce damage costing much more than that. For instance, what if someone trips and falls right outside your front door on an icy sidewalk you didn't think to shovel? Their medical bills might not equal $1 million, but what if they sue you for punitive damages? We live in a very litigious world, and attorney's fees alone can drive up your legal costs.

You can purchase umbrella insurance policies of $1 million, $2 million or any other increment, according to MSN, and pay only $200 to $300 per year for each million. That's only $17 per month on the lower end of the spectrum.

The Fine Print

There is no additional deductible on an umbrella insurance policy. You still have to pay the deductible assigned under the base policy (auto insurance, for example), after which the insurance company will pay any amount up to your umbrella limits.

It is important to talk to your insurance agent about the fine print of your umbrella insurance policy. For example, will they cover any additional events not covered by your auto or homeowner's policy? Are there any restrictions on events that they won't cover?

Shop around to find the best deal and consider purchasing all policies with one insurance company. You might earn a bundle discount that considerably lowers the cost of umbrella insurance, saving you money and increasing convenience when you need to file a claim.