The Most Important Insurance You Probably Don’t Have

Last time you boarded an airplane, you probably sat down and closed your eyes, plugged in your headphones, or started a book.  You probably didn’t think about how your seat cushion would make a great flotation device if you needed it.  Umbrella insurance is like that airplane flotation device – the odds are pretty good that you won’t need it, but you don’t want to find yourself without it when something catastrophic happens.

A personal umbrella policy (PUP) is your policy of last resort.  It provides liability coverage above and beyond your other insurance policies, like car or home insurance.  If you’re in a car accident and the other car is full people who love lawsuits, your primary liability coverage likely won’t last long, especially if they Google you and realize you are well off.  Umbrella insurance kicks in for liability above your standard per person or per accident limits.

If you’re sued and existing auto or home insurance doesn’t fully cover the damages, the judge could order you to liquidate your savings, sell your real estate, or even garnish your wages.  Personal liability insurance isn’t just for the wealthy– anyone can be sued for all they are worth.

And here’s the good news: this is one of the least expensive types of insurance you’ll find.

An umbrella policy may be appropriate if you own a home, are a landlord, have any high-risk hobbies like skiing or boating, or own a pet.  There are countless examples of when you may be liable for damages, like if your dog bites a neighbor, you throw a party and your deck collapses, or a neighbor drowns in your swimming pool.  According to Travelers, an umbrella policy will typically cover personal liability, property damage, personal injury protection against things like slander, as well as legal defense costs for any covered loss.

Umbrella policies tend to specifically mention the items they won’t cover, like damages covered under Workman’s Compensation, or damages that you expected or intended to cause.

A good rule of thumb is to get a policy that covers your net worth, including your home, savings, retirement funds, and any other assets.  The cost is low because it kicks in after your car or homeowner’s policy is tapped.  The Insurance Information Institute estimates a cost of around $150-$300 per year for a $1 million policy.

When it comes to selecting a policy, you can look at the company where you have your home or auto insurance, but it helps to shop around.  You also want to coordinate the coverage limits on your car/home/renters with the umbrella policy to be sure there’s not a gap in coverage.  This can occur when one policy will cover up to $250,000 and the umbrella policy doesn’t start until after $300,000. The International Risk Management Institute has a great checklist for evaluating insurers.