Try imagining this scenario: You invite a few guests over for a party. You did not realize that one of your chairs already had an unstable leg, leading one particularly chubby visitor to fall flat on his bottom and hurt his back. He wasn’t particularly close to you but was brought by a friend you had invited to the party and despite having him brought to the emergency room coupled with your profuse apologies, he still filed a lawsuit against you in court for negligence which led to the injury.
Let’s assume that you have homeowner’s insurance that provides liability coverage of up to $300,000. However, the person sued you for $500,000 and the court sided with his claim. Your homeowner’s insurance will shoulder the $300,000 which leaves you paying the remaining $200,000 from your own pocket. Ouch!
If you’re not super rich, this amount could decimate your retirement savings and be the cause of your financial ruin. It might even turn you off from giving parties forever.
However, there is a way to protect yourself from these unfortunate circumstances. You can get personal liability insurance, more popularly known as an umbrella policy. This type of coverage basically picks up from where your home liability coverage stops. In the example above, let’s say you have an umbrella policy of $1 million. After your home liability insurance has paid off the $300,000 the remaining $200,000 will be covered by your personal liability insurance. Even if the incident may have you sworn off parties forever, you are not financially ruined because of the personal injury your negligence caused someone else. Your retirement savings remain intact and you are not going to be in debt trying to raise the $200,000 that you would have to shoulder yourself had you not taken an umbrella policy.
While people commonly think of personal liability insurance as protection offered in case your family or even your pets cause personal injury to someone within your home premises, the protection it provides actually extends wherever you go. In the same manner that you can take your umbrella anywhere you go to keep yourself dry when it rains, your umbrella policy provides coverage anywhere you are.
Let’s say you are driving your car and by some freak accident damaged the fence of someone else’s property and injured the owner in the process. Naturally, you got sued and a judgment was levied that you had to pay $700,000 in damages. Your auto insurance can only cover a liability of up to $200,000. Without an umbrella policy, you are responsible for paying the remaining $500,000. This could be taken from your current assets and future earnings. This is obviously a recipe for financial disaster.
The scenario would be different if you had personal liability insurance. Because this goes with you wherever you are, the $500,000 left would be taken care of by your umbrella policy.
If the above scenarios still has not convinced you to get covered, let’s look at the reasons that would encourage you to consider getting an umbrella policy in more detail:
1. It protects you from those rare events that could potentially cause you to lose money you have worked so hard to save as well as any future earnings.
Personal liability insurance is one of those policies that you don’t get to appreciate until you are faced with a situation requiring it. When someone files a claim of personal injury against you and you’ve exhausted all the liability coverage of your homeowner’s and auto insurance policies, your umbrella policy will take care of paying off the remaining claims.
Admittedly, these occurrences are rare. When they do happen, however, your financial future could be put in peril if you are not prepared for the eventuality. An umbrella policy protects you from large unexpected expenses caused not only by your negligence but by bad luck as well.
2. It protects you from the expenses incurred in lawsuits.
You know for a fact that lawsuits are expensive. You have to hire attorneys to prove your case and legal costs mount as the trial progresses. Even if you win the case, the costs are still going to add up. With an umbrella policy, your defense costs are shouldered as well.
3. It keeps your assets protected.
Whether you have a lot of assets to protect or only have your home to safeguard, a judgment levied against you in a lawsuit could cause you to lose a substantial amount of your wealth. You could end up filing for bankruptcy. An umbrella policy guards against these kinds of occurrences.
4. It provides protection regardless of who is at fault.
Personal liability insurance provides protection even if you caused the accident or injury. Take note, however, that while an umbrella policy gives coverage regardless of who is at fault, it does not remove any criminal liability that you might be held liable for. The coverage you get also has a maximum benefit limit.
5. It’s very affordable.
For the kind of protection it offers, personal liability coverage is very cheap. For $1 million worth of coverage, your annual premium only costs $500 or a mere $42 a month. Of course, you can get a smaller coverage for a lesser premium each year. The reason why it’s so cheap is because the events that can decimate your savings rarely do occur. If they happen, however, you know how dangerous it can be to your financial future. Personal liability coverage is definitely worth the price you pay for it.
The following tips will help you when choosing an umbrella policy:
1. Determine how much you can afford.
Most umbrella policies are not sold as standalone policies but are sold together with other insurance products. This is because they only kick in after the liability coverage of both your homeowner’s and car insurances has been exhausted. If you feel that an annual premium of say, $500 for $1 million worth of umbrella coverage, is too steep, you can raise the deductible on your policy so that you can lower the premiums. If you do this, however, make sure that you have set aside some money that will cover the deductible before coverage kicks in.
2. Find ways to lower premiums.
You can do this by asking for discounts. If you bundle all your insurance policies with one insurer, you’ll be given a discount on your premiums. For instance, putting your car and home insurance under one roof will slash down about 20 percent of your premiums. You can also compare quotes among insurance firms so you will be able to find the best deal.
3. Add your “toys” to your umbrella policy.
If you own a boat, snowmobile or some other “toy,” you will need to have insurance for them and must see to it that these are covered in your umbrella policy. This way, you are going to be covered in the event of an accident involving their use. If you forget to do these, the money you will be forking out for claims could be very hefty.
4. Get the coverage you need.
If you really need $1 million in coverage, be sure to get it even if it means paying just a little bit more in premiums. Otherwise, you are going to end up regretting why you didn’t do so when bad luck comes knocking on your door. Because an umbrella policy is already cheap enough in itself, there’s no reason for you to scrimp on added premiums just to be able to get additional protection.
5. Don’t add more coverage if it’s not necessary.
While everyone could potentially benefit from an umbrella policy, you will have to really look at your situation to see if the coverage is going to be worth what you pay in premiums. For example, if you don’t have any children or dependents and don’t own a home, an umbrella policy might not be needed.
However, the situation is going to be different if you have toddler age kids, do a lot of entertaining at home or have pets. The liability coverage you have in your home and car may not be enough. An umbrella policy is going to protect your finances in the event that something happens while you are hosting a party.
An umbrella policy can safeguard your finances in case of the most unfortunate incidents that cause injuries to someone. You can get coverage ranging anywhere from $1 million to $5 million or even more. If you have a lot of assets to protect, personal liability insurance is going to be crucial in safeguarding the wealth you have worked so hard to build. Look at the assets you have, crunch the numbers and see how much you need so you have adequate protection that you can bring with you wherever you go.
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