What is Umbrella Insurance?
Imagine that you’re just a few years away from a well-deserved retirement. You’ve got a sizable retirement account, plus a house and car that are fully paid off. Altogether, your assets amount to a little over a million dollars. In short, life is pretty good.
Then, one day, you get into a car crash. Fortunately, you’re not badly hurt, and the damage to your car is well within the limits of your auto insurance coverage. Unfortunately, the other car involved in the crash is full of executives from a large company – and their injuries, and the damage to the car, are much more serious.
A court rules that you are responsible for the accident and must pay for the damage to the other car, the executives’ medical bills, and their lost wages for the time they were unable to work after the accident. Altogether, you owe about a million dollars in damages. Your auto insurance policy only covers the first $250,000 of that, so you’re on the hook for the remaining $750,000.
This could be a complete disaster for you – unless you have an umbrella insurance policy. This kind of insurance takes over when your other policies run up against their coverage limits. In this case, an umbrella policy would cover the extra $750,000 in damages and even pay your legal bills – saving you from having your assets wiped out and your retirement snatched away by a single unfortunate accident.
How Umbrella Insurance Works
Most types of insurance provide one specific kind of coverage. For instance, your auto insurance policy protects you in case of a car accident, while your homeowner’s policy covers your house, and the belongings in it, against theft or damage. By contrast, umbrella insurance is a single policy that covers most aspects of your financial life – just like an umbrella covers every part of your body in a rainstorm. So, any time you run over the liability limits on one of your other insurance policies, your umbrella policy is there to take care of the extra costs.