Do you need a personal umbrella liability policy? You should make the
decision based on how much you have in assets or income that you want
to protect. Consider your house, your income, your retirement and
other savings, and any valuables. If your assets total more than your
liability policy limits, then the answer is yes. This is simply an
application of the cardinal rule for buying insurance: buy only what
you need, in the amount that you might need, because when you need it,
nothing else will do.
Do not base your purchase decision on what you believe your risks to
be. The insurance company’s job is to worry about that, and you can
rest assured that their rates and underwriting practices reflect their
very sophisticated perception of the risks. The chances are that a
claim will result from something you did not anticipate or plan for, so basing
your buying decision on what you think might happen could leave you
uninsured when you most need coverage.
Umbrella liability policies also have two important advantages that
are often overlooked: additional benefits and lower cost per dollar of
coverage. The additional benefits extend beyond the obvious higher
policy limits and the lower cost is emergent from the way insurance
works.
The most important additional benefit is higher legal defense costs.
A liability policy typically obligates the insurance company to pay
your legal defense expenses until it has paid the policy limits as a
claim. The cost of defending a specific claim can sometimes exceed the
amount of the original claim amount.
For example, if you have a policy with a limit of $100,000, the insurance company must pay your
legal costs until it has paid $100,000 in claims. It might have to
pay $150,000 or more to defend the claim, so its cost could exceed
$250,000 to settle what only appears to be a $100,000 loss. If there
is a $300,000 claim against you, the insurance company could simply
pay the policy limit and walk away, leaving you to pay the balance
plus your legal costs.
This is why an umbrella policy can be valuable:
in the case of the $300,000 claim, the company would have to pay your
legal costs until it had paid the policy limit. Since umbrella
liability policies typically have limits of $500,000 and up, you would
have your legal costs covered because no insurance company in its
right mind would pay $500,000 or more on a $300,000 claim.
Another advantage is cost. If you simply buy a first dollar liability
policy, you will pay more than if you buy a basic policy plus an
umbrella. There are several reasons for this:
* An umbrella policy carries a large deductible, which is covered by your base policy. High
deductible polices are less expensive than first dollar coverages
because they are less likely to be triggered.
* If you buy both policies from the same insurer, you will receive a
discount on both the basic policy and the umbrella policy. Buying both policies from one
carrier is advantageous because it means that the same company will
work the claim. This avoids the issue of gaps in coverage or issues
that arise from different companies having different claims settlement
practices.
* An umbrella policy can cover the excess over several base policies, for example
your homeowner’s and auto policies. You will only need one umbrella
policy, which could further reduce your costs.
* The base policy limits are often adjusted downward to match the
deductible on the umbrella policy, reducing your base policy
premiums could be reduced. It could be adjusted upward also if your
umbrella policy carries a large deductible. Usually, however, the
cost reduction from lowering your base policy limits will be more than
the additional cost of reducing the umbrella deductible.
Umbrella liability policies can be a cost-effective way of making sure
that your assets and lifestyle are protected from litigation. They
offer peace of mind, which is the ultimate purpose of insurance.