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Consider umbrella insurance for liability protection

It provides extra coverage against risks you know about – and those you don’t.

In a world where you can sue and win for being served coffee that is too hot, you need to consider protecting your money.

A simple, cheap and easy-to-get insurance policy could save you millions of dollars – and a lot of heartache. It’s called umbrella insurance. Its purpose is to provide extra coverage beyond the limits of your existing auto or homeowners policies. The following story demonstrates its tremendous value.

While driving in a grocery store parking lot, a woman accidentally hit a pedestrian with her car. The woman who was struck survived but suffered significant injuries.

The woman who’d been driving felt terrible about the incident. She was also worried that she now faced a costly lawsuit. With life savings of about $1 million, she feared that she’d lose it all if a judge demanded that she pay the victim’s medical expenses and damages for the victim’s pain and suffering.

She had auto insurance, but the coverage was limited to $500,000. Due to the severity of the victim’s injuries, the lawsuit was certain to seek more than that – placing the driver’s life savings at risk.

Fortunately, she owned an umbrella policy. It cost a couple of hundred dollars each year – and it provided her with an additional $1 million of coverage beyond her automobile insurance.

Thanks to the umbrella coverage, her insurance company handled the whole transaction. The insurer paid all the legal fees, as well as the claim (in full), allowing the woman to keep her life savings. And she had peace of mind knowing that the victim received all the money she needed.

If you don’t have a personal umbrella policy, your life savings may be at risk due to unexpected, unforeseen, unpredictable and unintentional acts that cause damage or harm to others or their property.

Here’s what you need to know about umbrella insurance:

  • An umbrella policy provides extra insurance coverage beyond your existing auto and homeowners policies. That’s why they call it an “umbrella policy” – it covers pretty much anything that might go wrong. (Auto and homeowners insurance have more limitations.)
  • An umbrella liability policy is not expensive. A $1 million policy costs a few hundred dollars a year.
  • Umbrella insurance is usually available only from your auto or homeowners insurer. Your current insurer is already liable for your claims, so it is more willing to add umbrella coverage. Also, the profits from selling the policy are so low that most insurers won’t allow you to purchase an umbrella policy unless you already have another policy in place with them. So when buying umbrella insurance, talk to your auto or homeowners insurance agent first.
  • The lowest premium doesn’t necessarily indicate the best policy. If you’re paying less, you’re likely getting a policy with fewer benefits or more exclusions.
  • Make sure you understand the coverage you’re getting. Your policy’s Declarations Page summarizes the coverage, but it’s best to read the entire policy. By knowing what your umbrella policy does and does not cover, you can make an informed decision about whether you need to make changes.

Finally, the big question: How much umbrella insurance should you buy?

Your coverage should be one to five times the value of your home. For example, if you own a $2 million house, buy an umbrella liability policy that provides $2 million to $10 million of coverage.

Those with higher-than-normal risk (if you have a swimming pool, own a boat, entertain at home frequently, have kids, etc.) should consider additional amounts.

Once you get an umbrella policy, make sure to check in with your homeowners insurance company to determine whether your coverage level is up to date. And it never hurts to shop around every few years to see if you might be able to lower your rates with another carrier.

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