If you own a car, you face a plethora of risks -- including lawsuits.
Getting into a car crash can result in vehicle repairs, medical expenses and even a court case. "It’s quite likely that people who get in auto accidents will be sued if someone is badly injured," says Tom Baker, professor of law and health sciences at the University of Pennsylvania Law School.
If you caused the crash, and have to pay for the damages, the liability insurance on your vehicle will cover some of the costs. However, if the amount you need to pay is greater than what your auto policy covers, you'll have to personally cover the difference.
For example, you're sued after a crash and a court requires you to pay $700,000. If your auto liability insurance has a limit of $300,000, your policy will pay $300,000. You'll have to pay the remaining $400,000 out of pocket.
In this type of situation, an umbrella policy can help. Umbrella insurance provides extra liability coverage above what your auto policy covers. It can protect your assets, such as savings and your home, if you're sued after a car crash.
If you are someone with a high income, such as $100,000 or more, you should have an umbrella policy, Baker says. But high-earners aren't the only people who can benefit.
"Anyone with a steady job and some savings in the bank can benefit from the peace of mind provided by an umbrella policy," he says.
How umbrella insurance works
An umbrella policy offers additional bodily injury liability coverage. This means it covers the cost of medical bills and injuries to other people due to a serious car crash where you are at fault.
If also offers protection from property damage. In the case of auto insurance, this could include the cost associated with another person's property, such as damage to a car as a result of a car crash where you are at fault.
Some umbrella policies allow you to purchase additional coverage for uninsured and underinsured motorists. This can protect you and your family in a crash that isn’t your fault. Say you are hit by another driver and are seriously injured. As a result, you have medical expenses that total $1 million. If the driver who caused the crash doesn’t have auto insurance, or doesn’t have enough insurance coverage to pay for the medical bills, your own umbrella policy could be used to help with the costs.
Your auto insurance policy would pay for the cost of your injuries, up to the limit established in the policy. Your umbrella insurance would then cover the remaining cost, up to the maximum amount listed in the policy.
Umbrella policies are sold in blocks of $1 million, says Chris Sands, vice president and private CFO of oXYGen Financial Inc., a Georgia-based company that offers financial advice to individuals and businesses.
The coverage limit for a policy usually starts at $1 million and can go up to $5 million.
The policy is added to your existing insurance. If your auto insurance policy has a liability limit of $300,000, and you get an umbrella policy with $1 million of coverage, you'll have a total of $1.3 million in coverage.
"Umbrella policies typically range from $10 to $18 per month in premium cost per million," Sands says. So if you have a $2 million policy, you might pay between $20 and $36 a month for it.
And umbrella insurance protects your assets. Say you have $300,000 of liability coverage on your auto insurance policy. You also have a $1 million umbrella policy. You get into a crash and are at fault. The driver of the other car is a surgeon who is injured in the crash and can't work as a result. The surgeon faces medical bills and lost wages, and sues for $700,000.
Your auto insurance policy will cover its limit of $300,000 for the damages. The remaining $400,000 will be paid out from your umbrella policy.
3 tips on how to find the right umbrella policy
Umbrella insurance offers liability protection, but each umbrella policy is unique, says Kristofer Kirchen, president of Advanced Insurance Managers, LLC, based in Tampa, Fla.
Here are three guidelines to help you find a policy that covers your particular needs.
1. Understand the risks.
You could face problems even if you don't directly cause a crash, says Darrell Castle, founder of Darrell Castle & Associates PLLC, a bankruptcy and personal injury law firm in Memphis, Tenn. Say a father has a son who lives at home. The son is covered under the father's auto insurance policy. The son has too much to drink, drives the car and hits a person on a bike. The bike rider is injured and has a hospital bill of more than $500,000, which is more than the amount covered in the father’s auto insurance policy. The injured person could sue the father, since he has the auto insurance policy and coverage.
"An umbrella policy would have covered the father," Castle says. Most umbrella policies provide coverage for members of the family.
2. Get enough protection.
To get an umbrella policy, you'll first need to have the maximum liability limits on your auto insurance policy, Kirchen says. Say your auto policy offers a a $300,000 combined single limit coverage or a split limit liability coverage of 100/300/50 per person, accident, and property damages. You’ll want to have this maximum amount of coverage. The umbrella insurance you purchase would then cover costs that go above this established amount.
Some carriers may require an underlying $500,000 combined single limit coverage or a 250/500/100 split limit insurance policy, especially if a young driver in the household or the insured has a poor driving record.
Also consider the assets you want to protect. This could include your home, savings accounts and investments.
3. Go over the details.
"You typically have to bundle your auto and homeowners insurance policies to get umbrella insurance," Sands says. Some umbrella policies, however, are sold separately.
Before taking out an umbrella policy, read through it, Kirchen suggests. This way you'll understand -- before a crash -- exactly what is covered in the policy.