Thoughts on Umbrella Insurance (and Rihanna)

I had a friend visiting over the weekend, and he had a lot of insurance questions that he wanted to ask (surprising, I know!). The reason for this is because his wife and him are from the UK and insurance is handled there differently than the US. The example that he kept going back to is that people in the UK have a seemingly endless supply of liability insurance, such that the limits of Bodily Injury and Property Damage in the US are literally foreign concepts to him.

I?m not sure if he?s correct or not, given that I?ve never had to buy auto insurance in the UK, but what he touched on was a very good point. Even in the US, if you have ?really good? auto insurance coverage, perhaps something that covers you up to $500,000 in an accident, there is still an exposure. If the person injured was unable to work and then sued you for [insert reason here] (because let?s face it, it can be any reason) then your insurance would only cover you up to that $500,000 limit. However, you can reach that number pretty quickly with legal bills, disability, judgments, et cetera ad nauseum (which means: continued until it makes you sick) especially if you get sued and are forced to pay the legal judgment from both your current assets and your future earnings.

His point was that in the UK this would never be a problem, and the only advice I had for him is that he should get an umbrella policy. Actually, I believe the rule of thumb advice is that anyone who has over $1 million in assets (including your house) or makes over $100,000 a year should have an umbrella policy.

The way that an umbrella policy works is, well, like an umbrella. It sits on top of your auto insurance and home/renters insurance, and it only comes into effect if you exhaust the limits of those underlying policies. So in the previous example, if you got sued for $750,000 and lost, you would have been liable for $250,000 since your policy only covers you to $500,000. Obviously, this would not be a great outcome for you. This is why you would have an umbrella policy, which usually comes in $1-million increments, to sit on top of your auto policy and then cover the outstanding $250,000.

If your net worth was over $1 million, or you earned significantly more than $100,000 a year, you may opt to get more coverage in your umbrella policy. Many insurance agents recommend an umbrella policy of at least $2 million for established families, or even up to $5 million for people that have rental property.

While I?m tossing around a lot of big numbers here, umbrella insurance is actually pretty affordable ? so don?t get scared away so easily. The reason it?s so affordable is because it sits on top of your existing policies and will only come into effect after you?ve used up their limits. So a $1 million umbrella policy on a family with one house and two cars will probably cost $200 a year, and a $2 million policy would probably cost around $300 a year.

For me, this seemed more reasonable than I had first assumed, but still finding an extra $200 a year isn?t always easy for the average family. To counter this, I?d suggest increasing your deductibles on your home and car. Just by increasing your default deductibles from $250 or $500 up to $1,000 will probably save you a few hundred dollars a year. This means that you could essentially afford the umbrella policy out of your current insurance spending.

By doing this, a few things will happen, which I think are ultimately beneficial for most families: 1) You?ll lower the amount of claims you make on your insurance. Insurance companies aren?t in this for free, and small claims will ensure that you don?t receive discounts that you otherwise would have had. Worse yet, they will increase your premiums to the extend that you?ll probably pay back a portion of your claim anyway. 2) You still cap your ultimate exposure to $1,000, which for most families is pretty affordable given the likelihood of a disaster/accident. Similarly, you?ll have increased the amount of protection you have by anywhere from 2x to 10x your original coverage limits.

While Leaky.com does not offer umbrella insurance (or umbrellah insurance, as Rihanna would spell it) as of this article, we can still help you save money through comparing car insurance prices and policies to help you find the best insurance company for you.

Source: http://leaky.com/blog/thoughts-on-umbrella-insurance-and-rihanna/

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