What is an umbrella insurance policy? – Umbrella Policy Explained
Umbrella Insurance
An umbrella policy is something you buy that’s an additional layer above your other insurance policies that you have. Each and every one of us already has different policies that will take care of us. Like if you own a home, you’ve got a homeowner policy. If you’ve got a mobile home, you’ve got a mobile home policy. If you rent, or you have a condo, you either have a renter’s policy or a condo policy. If you’re a landlord, you’re also going to have a landlord policy or an ATV and RV; there’s a whole bunch of different types of policies that you could have depending on what you own and what your situation is.
Well, each and every one of those has included in it a thing called liability insurance…. at least it should if your agent’s written you correctly. You should have liability insurance included in that.
Let’s talk about liability insurance just for a second. Liability insurance, as a reminder, is that piece of the policy that’s going to protect you and your assets in the event that someone brings a claim against you. Let’s say that something happens and they bring a suit against you because of some sort of incident, or you just have an auto accident or something like that and someone else gets hurt or you damage somebody else’s property. The liability section will provide taking care of fixing the other person’s car, taking care of their medical bills, or defending you in the event that someone brings a lawsuit against you, and then pay for whatever the subsequent damages potential are there. That’s what liability insurance is.
Now that we understand that, let’s talk about an umbrella policy. Sometimes you will hear it referred to as an excess liability policy. Those words can be interchangeable to some degree, but we’re going to use the word umbrella for the rest of this discussion. An umbrella policy, if you think about it in the sense of the umbrella that I had in my hand there at the beginning of the video, can help if you get caught in a rainstorm. That umbrella is a layer of protection right above you to protect you from the rain or the elements, whatever that may be. It’s to protect you and to give you coverage from that. That’s what an umbrella policy does also. It’s an additional layer of protection or covering your underlying policies.
You have your umbrella policy here and underneath it, you have your homeowner, your renter’s policy, your landlord policy, your auto policy, your boat owner’s, your RV, motorcycle. Whatever those policies you have, this is another layer above that of liability protection. Remember we talked about liability at the beginning of the video for just a moment to make sure you knew what we were talking about here. This is another layer above it.
Why do I need that?
It depends on a lot of different things, but if you have a situation where you exhaust the liability limits of your other policy, this will pick up where that leaves off. And you think, “well how does that happen?.” What I’m talking about is every one of those policies we’ve mentioned, they’ve got a limit, meaning there’s a maximum that they will pay. And whenever they reach that maximum, what happens next is you start putting up the bill.
Let’s say you have a half a million liability policy. You go to court, wind up running out of liability limits there because it’s a long, drawn-out court case. What happens after that is the insurance company says, “Hey, we’ve used up all the limits that we have. It’s time for you to take over the legal defense now.” It’s not because they’re a bad guy or something like that, it’s just they’ve met their obligation. You had whatever limits you had purchased, you’ve got that. Well, that bank account is empty now. That limit you bought has been used up. So, now it’s up to you to dig into your assets, either your savings, your bank account, whatever investments that you potentially may have, or also potentially having to sell some of the assets that you have, maybe vehicles, RV, maybe even your home, unfortunately. So, we don’t want that to happen.
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Understand that all of those sub-policies have a limit. They have a maximum amount that they will pay. After that, either you have to rely on an umbrella policy, or your own personal income and assets, which you really just don’t want to do.
That’s kind of how it works. It’s an additional layer above those policies. If you use up those layers down here when your auto, home, RV, motorcycle, or whatever, then it kicks in. But that raises a really important topic that we need to talk about. And that is you need to make sure all those policies are with the same company. Why? Well, all policies are not created equal. There are different policies, there are different types of companies that really target different types of clientele. And also there are different policies that may have some sort of exclusions in there, and that may limit the amount of coverage that you would have to apply underneath your umbrella policy. And you don’t want to end up in that situation, so it’s really important to have those all with the same carrier.
How do I get it?
You want to make sure that they’re with the same insurance company. And I’m not talking about the agent, I’m talking about the actual insurance company. And the best way to do that is to make sure that you also have it with the same insurance agency. Your insurance agent should be acting as a risk manager for you, a personal risk manager for you, to make sure that you’re covered like you ought to be. If you’ve got those policies spread out among different companies and even different agencies, it’s going to be really hard for your agent to do the correct job. That’s why it’s important that you have all those policies with the same agent so that you can make sure that they also have them with the same company, or they’ve taken into account whatever potential scenarios may be there. So, it’s really important to make sure that you do that for yourself. Don’t try to take a shortcut in that area. Make sure that it’s all with the same agent, the same company.
How much is it going to cost?
It was really inexpensive. I’ve seen them anywhere from $100 to maybe a few hundred dollars depending on the assets that you have and then also the limits of coverage that you need. A couple of different things that factor into how much the insurance is going to be, obviously one is the rate the company’s going to charge. That’s one part of it. But some of the other things that are really important is how many properties do you own? Do you have a house only or do you have a house and five rental properties, or maybe a seasonal property? Well, that comes into the factor because the more exposure you have, the more things you have, the greater the risk is for a claim. The more things you have, the greater the risk, the more the premium is going to be. But understand, it doesn’t affect it significantly, but it does affect it.
Also, take into consideration, how many toys you have, such as ATVs, motorcycles, boats, maybe RVs. How many vehicles do you own? All those things come into play in determining what the cost is going to be of an umbrella policy.
What’s another thing? Well, also how many limits of coverage that you need. You can buy half a million, a million, two million, up to probably ten million and even more depending on what your needs are. So the more you buy, the more it’s going to cost. Again, it’s not significant, each time you take another step up it’s not tremendously significant in the cost of it, but they do come into factor there.
Let’s say that you need to get an umbrella, but maybe you just need to get an umbrella and you won’t lower limits. Hey, that still will help you and protect you more than where you’re at now. As you grow financially, you can always increase those limits, right? So, start somewhere. At least start small, and then build up.
What is it going to do for you? Well, as I said earlier, it’s going to give you an additional layer of protection to make sure that your assets are protected.
Who needs it?
Well, really almost everybody needs it. If you have any sort of assets, you have any sort of savings, property, you’ve amassed some property or some assets or some savings or investments, or just retirement, or whatever, you want to protect that. And it’s a very inexpensive way to make sure that something doesn’t happen to that. You’ve worked really hard to get to the position that you’re in. You’ve acquired a lot of assets, a lot of property, you’re building a life for your family, or you have built a life for your family. And depending on where you’re at in your stage of life, either you’ve already amassed an estate for yourself so that you’re getting closer to that time of retirement, or you’re looking forward to one-day retiring and you’ve got a plan. Well, your plan to financial peace can be easily side railed by a liability claim that’s not covered right.
If you want to make sure that doesn’t happen, buy an umbrella policy. It’s an inexpensive way to distribute that costs over a lifetime to make sure that you don’t get sidetracked. It’s not about just protecting you now, it’s protecting you in the future to make sure that you don’t get sidetracked on that. I think almost everybody if you own anything, you own a home, you own vehicles, you’re saving, you’re building a life for you and your family or have built a life for you and your family, you’re looking forward to retirement one day. Hey, that’s you, you need an umbrella policy.
How do I determine how much I need?
That’s the question, right? As I said before, maybe you can’t afford a lot. You need to be mindful of your budget. But at least start somewhere. Think about this, the more assets you have to protect, the more limits you need. Think about that. Sit down, look at your assets, write it down on a tablet, a piece of paper, whatever. Start writing down things like your home, your vehicles, your savings, your retirement, your IRA. If you’re a business owner think about that. Just think about those different things that you’ve got in your life, how much those things are worth, and what you’re planning on for your retirement. See what those numbers are and see if maybe you can buy liability limits, something comparable to help protect you for that amount that you have.
Because the thing is, remember what I said in the other videos, is the number one job of your insurance is to protect your assets and to protect you and to keep you from becoming side railed on your financial peace journey. Make sure that you’ve got adequate insurance there to protect that.
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Beaux Pilgrim, CEO
Beaux Pilgrim
Reed Insurance