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With a question about umbrella coverage, your net worth doesn’t much apply. The question is more about what you need in order to protect yourself, your assets and your family. That has more to do with your exposure and risk of loss than with how much you have to lose. As to whether someone would need umbrella insurance in this scenario, the answer is truly a “maybe.” It depends on your current insurance coverage, the costs of extra coverage and the specific risks you’re concerned about.
Umbrella insurance is a secondary policy that kicks in after your primary insurance policy is exhausted. It covers any losses or payouts beyond the coverage of your primary insurance.
For example, say that you have an auto insurance policy that covers up to $150,000 in liability and damages. You are considered at-fault in an auto accident with a driver who suffers $95,000 worth of damage to their car and $155,000 worth of personal injuries and lost wages.
Your insurance policy could pay for the first $150,000 of this claim. Then, an umbrella insurance policy could pay that remaining $100,000 for which you would otherwise be personally liable.
The main reason to buy umbrella insurance is third-party liability. By and large, you can know in advance the value of your own property and assets, whether personal or real estate. Since this is knowable, you can buy insurance to cover most cases of personal loss.
Liability is another matter. It’s impossible to predict with any certainty the value of a third party’s assets or injuries. You might be in a car accident someday, or accidentally injure a guest at a party. Since accidents are impossible to predict, so are the costs and harms associated with them. This is where umbrella insurance comes in, as it covers you in case of unpredictable liability that exceeds your policy’s coverage.
Most consumers who get umbrella insurance will use it to supplement either auto or homeowner’s policies. Typically you must have an existing primary insurance policy, as this will not act as your main insurance. For homeowners, this can supplement coverage that you get based on your personal needs and mortgage requirements. For drivers, this can supplement coverage that you have based on your personal needs and your state minimum coverage laws. A financial advisor can help you review and coordinate your current coverage.
Like all insurance, the specific costs of umbrella insurance vary based on your policy and coverage needs. However, in most cases, individual umbrella policies offer liability-focused coverage. This means that your policy will typically cover third-party injury, harms and property losses. For homeowners, this coverage will typically extend to general liability protection, for example if someone sues for defamation.
This is why the need for umbrella insurance is typically unrelated to your personal wealth. The reason for umbrella insurance is risk of accident and loss, not necessarily collectible assets. Someone with $25,000 in cash is as much at risk of losing everything as someone with $1 million. Indeed, arguably the more money you have the less you might need umbrella coverage, since you can more likely afford excess claims, though umbrella coverage can be pricey.
These policies typically do not protect your own assets and personal property, as you are assumed to price out your own assets within your primary insurance policy. They also typically don’t cover intentional or criminal acts, and frequently do not cover cases of contributory recklessness.
Since these are high-coverage policies, you typically will buy umbrella insurance in increments of $1 million. While professionals like doctors and lawyers will typically have liability protection through their workplace, someone with a higher public profile or who frequently invites people onto their property is at more risk of lawsuits, and so might want to consider more protection. You can use this free tool to match with a financial advisor who can help you evaluate the appropriate coverage for your circumstances.
Umbrella insurance is a policy that offers you additional coverage beyond your basic homeowner’s or auto insurance. Most policies are built around liability, protecting you from third party claims that exceed your policy’s caps.
A financial advisor can help you build a comprehensive financial plan surrounding your life. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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