What is an Umbrella Policy?

Umbrella insurance is a type of liability coverage that acts as an additional layer to basic homeowners and auto liability policies, or, in the case of a business, general liability and business auto insurance. An umbrella liability policy provides a much higher limit of insurance than basic liability and can address claims over and above claims directly relating to your auto and home.

The primary purpose of a personal umbrella policy is to protect an individual’s assets from unforeseen events, like an accident where that individual may be held liable for damages. If someone files a lawsuit against you, the umbrella coverage will pay the damages you're legally required to pay up to the policy limit.

Your insurance licensing study material will definitely cover the umbrella policy in detail, and you should expect questions on the insurance exam in this regard as well.

What Does An Umbrella Cover?

The umbrella policy provides an added layer of coverage above the liability limits of the underlying policies. It provides protection from property damage and bodily injury liability claims. An umbrella policy can also deliver broader coverage and can help cover false arrest, libel, and pay for legal fees if necessary.

How Does it Work?

An umbrella policy can respond if you’re required to pay damages after being found liable, or if a legal defense is needed if you are sued, even if you’re found not to be responsible. The umbrella insurance policy is “triggered” once the underlying liability limits are exhausted or in a scenario where the claim is excluded by the underlying liability policy. Relative to “how it works,” a claim will be made against the policyholder by the aggrieved party. Then the insurance carrier may pay a settlement amount, but not beyond the limits of the policy. If the payment sum exceeds the limits of coverage, the policyholder would be responsible for paying any remaining amounts.

Why is the Umbrella Important?

Your house, car, retirement accounts, savings and checking accounts and possibly even future earnings, are all considered to be assets. It’s imperative to understand that if you’re sued for a significant amount and don’t have the liability insurance coverage to pay those costs, all of those assets mentioned above are at risk. Most usually purchase an umbrella policy because they’ve heard horror stories and many want to avoid the same fate of financial ruin due to some unexpected accident. An umbrella policy can provide the coverage to prevent the loss of these important assets.

What is the Cost of an Umbrella Policy?

The premium for a personal umbrella policy typically begins at around $250 for $1 million in coverage. The premium increases as the limits increase, of course. But doubling the limit to $2 million, for example, won’t necessarily double the amount of premium you’ll be expected to pay.

Is Umbrella Insurance Tax Deductible?

Premiums for a personal umbrella policy aren’t generally tax deductible. The IRS allows businesses to deduct normal business expenses. Because insurance premiums (including those for an umbrella policy) are an expense related to running a business, they would be deductible by the business.

There is a grey area when it comes to deducting insurance premiums for a particular type of business, however, and that’s for rental property owners. If you rent out houses that you own, you’re operating a business for profit, but you’re also able to cover those houses with a personal umbrella policy. In this scenario, you might be able to deduct some portion of these premiums as a business expense.

What Umbrella Limits Do You Need?

Consider a few things when selecting policy limits:

While you can’t be expected to predict everything, think about the risks you may face. Consider the types of activities and risks that a homeowner or renter may face, the potential of causing an accident, or any potentially hazardous activities you’re involved with that could put others at risk.

Consider your assets when choosing policy limits. These can include possessions, properties, savings, investments, and retirement assets. The more you have to lose in this regard, the more coverage you should have.

Think about future income and how the loss of it may affect you. A lawsuit can result in a loss of both future income and current assets. Even individuals with minimal assets to safeguard should consider the long-term consequences of a significant loss of income.

As you go about reviewing future earnings, think about earning potential over many years. After all, you may not have much right now, but assuming regular pay increases and promotions, there may be substantial amounts down the road that you should factor into any policy limit consideration.

As a prospective insurance agent or broker, you should be able to help a client determine specific risk factors and policy limits that are right for their situation.

Where Can You Purchase an Umbrella?

You can purchase an umbrella policy through the same agent or carrier that you bought your homeowners or auto policy from, of course. In fact, you’ll likely see some pricing advantages by using the same insurance carrier as your home and auto policies. In any case, a qualified insurance agent can comparison shop across several insurance companies to find the best policy for your needs.

Is There Coverage for Lawsuits?

An umbrella insurance policy provides coverage for liability claims and lawsuits, even if they don’t result in a trial. Safeguarding assets against a lawsuit is the primary reason that people buy umbrella coverage. Liability insurance is there to shield you and your family if you are found liable for causing bodily injury or property damage, and also for the cost of a legal defense. When someone files a lawsuit against you, they’re looking for compensation for damages you are alleged to have been responsible for. The homeowners or auto liability insurance policy will respond to costs connected with the claim beyond the deductible, but only up to the policy limits. Then, If the aggrieved party is awarded amounts that are greater than those limits, the umbrella coverage is triggered. In some cases, umbrella policies also have deductibles or self-insured retentions that have to be met prior to responding.

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