What is an Umbrella Insurance Policy and Why Do You Need One?

Today, I want to talk about one of the most significant holes I see in the personal insurance side of risk management. Often, business owners will have this coverage for their business but not realize they need it for their own lives, too. It’s so important that I recommend (in writing) that all of my clients purchase this type of policy. What am I talking about? I’m talking about an umbrella policy. Specifically, I want to answer: What is an umbrella insurance policy, and why do you need one?

Podcast Time Index for “What is an Umbrella Policy and Why Do I Need One?”:

• 01:00 – What is an Umbrella Policy And Why Do You Need One?
• 02:54 – What Does it Cover
• 04:14 – What Doesn’t it Cover
• 05:05 – When Should You Have an Umbrella Policy
• 10:49 – How it Works
• 11:58 – How Much Do You Need?
• 14:10 – Wrap Up

What is an Umbrella Insurance Policy?

Of course, the word “umbrella” refers to the device you hold over your head when it’s raining outside. Similarly, an umbrella insurance policy covers, or goes over, the head of a couple of other insurance policies you have. Essentially, an umbrella policy adds an extra layer of liability protection that exceeds your liability limits on your car insurance, your homeowners’ insurance, and a couple of other types of coverages. It covers excess expenses due to bodily injury, personal injury, property damage, and potentially landlord liability.

For example, let’s say you’re driving down the road, and you run a red light, hitting four vehicles. Well, many passengers in those vehicles end up in the hospital, and one of the passengers dies. That’s a bad day. Since you were in your personal car, you get personally sued from all the parties you harmed in the accident. Your auto insurance should immediately kick in, but it will only cover expenses up to your coverage limits. If your policy covers up to $250,000 per person and $500,000 per accident, that’s not going to be enough to cover all the costs for bodily injury, personal injury, and property damage you caused in this accident. That’s when an umbrella insurance policy would come in and pick up the costs that exceed your liability limits.

What Umbrella Insurance Policies Do Not Cover

Although your umbrella policy will help cover bodily injury, personal injury, and property damage, there are some things it doesn’t cover.

• Typically, it doesn’t cover personal belongings.
• It also doesn’t cover intentional or criminal acts or omissions. You can’t go out and intentionally run your car into somebody and expect your umbrella policy to cover it.
• A personal umbrella policy also doesn’t cover written or oral contracts,
• Nor does it cover business activities you conduct in your house.

So although umbrella insurance is not required by law, I tell every client I work with to have an umbrella policy with at least a million dollars of coverage.

Who Needs an Umbrella Insurance Policy?

Maybe you’re not sure about having an umbrella policy. You say, “Justin, I don’t have one, but should I consider it?” Well, I typically recommend you have an umbrella policy IF you:

• Own property
• Operate a business from your home
• Have significant savings or other assets
• Travel abroad often or for extended periods
• Own big dogs or dog breeds considered “aggressive”
• Have trampolines, swimming pools, rope obstacle courses, tree forts, or the like in your back yard
• Own rental property
• Coach other people’s children
• Serve not-for-profit organizations
• Participate in sports where you could accidentally injure someone else (hunting, drag racing, etc.)
• Leave reviews for businesses that could potentially damage their reputations

How Much Coverage Do You Need?

If you need an umbrella insurance policy, then how much coverage do you need? Typically, the minimum coverage you receive when you purchase a policy is $1 million, and the average cost on a policy like that is around $120 to $160 per year. From there, policies are typically written in million-dollar increments of coverage – $2 million, $3 million, $4 million, etc. – and increase in cost accordingly. So, friends, you can buy excess liability protection for less than the price of a pizza (per month). That’s not very expensive, especially for coverage that could protect you and your assets.

Get an Umbrella Insurance Policy

As I mentioned at the beginning of this article, I tell all of my clients that they should purchase an umbrella insurance policy. And friends, I’m not an insurance agent. I make no money from their purchase of an umbrella policy, and I earn no commission or referral fee from this recommendation. I think everyone needs an umbrella policy.

I find this type of insurance so valuable that I make my clients sign a waiver if they refuse to buy at least a $1 million policy. In writing, they must say, “I am not interested. I understand that you recommend this, but I am (of my own volition) choosing not to purchase an umbrella insurance policy.” You see, the last thing I want is for a client to have something tragic happen and say to me, “You never told me about this protection policy.” I don’t want to be sued over an Errors and Omissions claim.

So friends, get an umbrella insurance policy. Call your insurance agent. If you have $1 million in coverage, talk to your agent about whether you need $2 million in coverage. If you have $2 million, ask if you need $3 million. Your agent has methods to figure out what amount of coverage you need, so talk to your agent or your broker and see what amount makes the most sense for you.

I hope this article helps you protect yourself and your business from the unexpected. Lean on the expertise of a good agent to help you pick the right types of business insurance for your particular needs. If you would like to learn more, take a look at Are You Adequately Covered? Review Your Homeowners Insurance Policy