What is an Umbrella Policy?

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If you ever face litigation, or simply put, getting sued, your standard home insurance policy will provide you with some liability coverage. This may include partial payment coverage for judgements against you and attorney’s fees. The purpose of your umbrella policy is to protect your assets from an unforeseen event where you are deemed responsible for damages or bodily injuries.

Umbrella insurance is a form of liability coverage that will supplement your basic liability policy. An umbrella policy will activate when you reach the limit on the underlying liability coverage in a homeowners, renters, or condo policy. It will also cover you for things such as libel and slander.

For about $150 to $300 per year you can buy a $1 million personal umbrella liability policy. The next million will cost about $75, and $50 for every million after that.

Umbrella policies will only be used, or go into effect when the underlying coverage has been used. Most insurers will want you to have about $300,000 of liability insurance on your homeowners policy before selling you an umbrella liability policy for $1 million of additional coverage.

What Does Umbrella Insurance Cover?

It’s easiest to consider umbrella coverage as excess liability; coverage that comes to your aid when the limits of your basic policy has exceeded. It will protect you from bodily injury liability and property damage liability claims. In addition, umbrella policies also provide assistance to cover legal fees, and assorted legal issues that may arise.

How Does Umbrella Insurance Work?

If you are sued, found liable and ordered to pay for damages, or need to pay for your attorney fees, an umbrella insurance can be activated. An umbrella policy only works once your basic liability limits have been exhausted or the claim is excluded from the basic liability coverage. The claim will be made against you, the policyholder, on behalf of the wronged party. Then your insurance company may pay the settlement amount up to the limits of your coverage. If the settlement amount exceeds your coverage limits, you are responsible for paying the remaining amount out of pocket.

Why is Umbrella Insurance Important?

If you are sued and owe more than what your basic liability insurance covers, you will be personally responsible for making the payments. The settlement will consider your belongings, such as your car, house, any investments (and retirement account) as assets. These assets can become vulnerable in the event of a lawsuit loss. Consider the umbrella policy as a preventive and protective measure for your finances.  

Is Umbrella Insurance Tax Deductible?

A personal umbrella policy’s premiums are typically not tax deductible. However, if the umbrella policy is for your business, or supplements your other business liability policies, your premiums may be tax deductible.

A possible exception is if you have rental properties. If you own and renting out your homes or condos, that may be considered a “business”. You can also include your rental properties under a personal umbrella policy. In this case, you may be able to deduct a portion of your premiums on your taxes.

So how much umbrella coverage should you carry?

When choosing your coverage limits, consider three things:

  1. Consider risks as a homeowner or renter, the risk of causing an accident during your work commute, and any potentially dangerous activities you participate in that could put those around you at risk.

  2. The value of your assets. These include properties, possessions, stocks, bonds, savings and retirement funds. The more assets you have to protect, the higher the umbrella policy limit you should consider.

  3. The potential loss of future income. Because liability lawsuits can result in loss of both current assets and future income, even those with few assets to protect may want to consider the long-term ramifications of a serious claim.