Considering Umbrella Insurance: 5 Things to Know

Umbrella insurance is a form of liability coverage that works in conjunction with your homeowners and vehicle insurance, taking over when the liability limits of those policies have been exhausted. It's a specialized form of excess liability insurance designed to protect your assets in the event that you're facing a high dollar liability lawsuit.

Here are some things to keep in mind when considering buying an umbrella insurance policy:

1. In order to take out an umbrella insurance policy, you must first already have a standard insurance policy in place - homeowners coverage for your house and vehicle insurance for your vehicle(s).

2. Most umbrella policies start with a minimum payout limit of one million dollars, which should cost you somewhere around $200 per year (more or less). You should be able to add another million dollars in coverage for an additional $150 or so, with each extra million in coverage costing even less than the previous million.

3. Since umbrella coverage is designed to protect you from high dollar liability losses, if you have minimal assets you likely don't need this coverage and can depend on the liability coverage of your auto and home insurance policies. If you have a net worth of a million dollars or more, however, you should definitely consider carrying an umbrella policy of $1M or more. Think about what would happen if you're found to blame for causing a ten car pileup on the freeway. Your liability could top many millions of dollars, and without the protection of an umbrella policy you could lose everything you've worked your whole life to accumulate.

4. If your child gets into a fight at school and causes serious physical damage to the other kid, his family may very well sue you. If your son throws a party at your house while you're out of town, alcohol is served and one of the party goers has an accident while driving home, his or her parents will probably sue you too. A benefit of umbrella insurance is that it covers you and everyone in your immediate family, so you're protected.

5. Best advice is to obtain an umbrella policy equal to the amount of your total net worth as a minimum or, better yet, one and one-half times your net worth to allow for growth of your assets. If you're unsure about the need, better to be safe than sorry!