A married couple, “Bob” and “Betty” (names changed), sent me a question recently about “Umbrella Policies,” so, for those of you who are unfamiliar with this insurance product, here’s the scoop.
An Umbrella Policy, also known as a PUP (Personal Umbrella Policy), is used to protect your assets from a lawsuit or substantial liability claim. As the term implies, umbrella insurance is an added layer of protection over and above homeowners and automobile insurance products. Therefore, to be eligible for a PUP, you must already have a certain amount of auto and homeowners insurance in place.
Here’s a simple scenario. Let’s say Bob’s auto policy covers him for $300,000 in personal liability, and someone brings a lawsuit against him for an accident that was his fault. If the claimant is awarded $500,000, Bob’s auto insurance would pay $300,000 and his Umbrella Policy would kick in the additional $200,000. With the PUP, he would not be out-of-pocket the amount (in this case, $200,000) over and above the auto insurance policy’s limit.
Umbrella Policies can be purchased from a property and casualty insurance agent or from a personal line insurance agent. Coverage limits are usually quite high – one million dollars is the low end of the spectrum and, generally, coverage amounts go up in million dollar increments. The premium cost increases with the coverage amount, as you would expect.
If you don’t have an automobile, or any property, this type of insurance probably isn’t a fit for you. However, if you do have a home and vehicle, and you were to lose a large liability lawsuit, it is always possible that your wages could be garnished, if you don’t have enough money to cover the judgment. Umbrella insurance can also pay for legal defense. Keep in mind that some of your assets can have a level of protection inherently “built in.” An IRA account or a life insurance policy can have greater protection from a claim than cash in a bank account. Protection varies by state, too. In Florida, for example, homesteaded property carries a greater level of protection from claims.
If you are concerned that a liability claim could ravage your life’s savings, added PUP insurance might be a good solution. Or, you may want to work with an attorney and financial planner to restructure your assets to afford the most protection possible. Of course, nothing is bulletproof, but Umbrella insurance, along with good planning, can certainly make you feel less vulnerable, should the threat of rain turn into a downpour or even hail!