If you’ve been weathering our current economic doldrums by skimping on insurance coverage, the pennies you’re saving could put you at risk of a financial tsunami. Pinch pennies on certain types of personal policies like auto insurance and homeowner’s insurance coverage and one personal injury lawsuit could wipe you out. If you have assets worth protecting, umbrella insurance can cover the gaps in your basic homeowners insurance and auto insurance policies.
Personal umbrella insurance (also called gap insurance) provides an extra cushion of coverage that takes up the slack between where your homeowners or auto insurance caps and the additional expenses you might incur such as medical payments, property damage, court costs and similar charges. Typical umbrella coverage starts at $1 million, but you can buy up to $10 million in coverage. Usually, umbrella insurance is purchased as an add-on to an existing policy. Insurers may require that you have a minimum amount of coverage on your home or auto (or both) before they’ll sell you an umbrella policy.
Before you buy umbrella insurance, make sure you need it. Analyze your exposure to risk. What is the likelihood of someone being injured on your property? They’re higher than normal if you own a dog or have swimming pool, for example. Do you own valuable assets like a home, savings account, stocks or other items that would be at risk if you were sued and your insurance didn’t cover all the loss or damage? If you answered yes to either question, you’re a good candidate for umbrella insurance.
You should expect to pay a higher premium (for example an additional $150 per year for $1 million gap policy), but you can lessen the impact with a higher deductibles on your basic home or auto policy. You can also take advantage of money-saving discounts such as using the same insurer for all your policies. You should also compare various policies to see if switching to another company for your basic policies and umbrella coverage makes sense.
Be sure you get the coverage you need. If you own a boat, motorcycle or RV, for example, add them to your umbrella policy. If you rent boats, cars or recreational vehicles, make sure your umbrella policy covers that type of risk. Even if you live in a state that bans punitive damage awards, you could still be sued if your cause a death, injury or property damage in a state where punitive damages are allowed. These are just a few examples of potential risk. You’ll need to assess your own situation to make sure you have a big enough umbrella to keep you safe.