Is it worth buying an Umbrella?

All of the traffic is at a standstill. You’re standing on the side of the road bewildered; you’re in shock. People are coming from everywhere huddling around the front of your car. Is this a nightmare? You retrace the last few moments:  noting the time you left home, when you dropped the kids off at the day care, you were heading to work on Rt. 101. Then panic sets in as you recall the blinding sun’s glare while approaching the Rt. 116 intersection.  You never saw the jogger until about a second before impact.  You weren’t drunk. You weren’t speeding. You weren’t talking on your cell phone or texting.  Why did it happen?  Where did he come from?

When people come in to buy insurance they are looking to protect themselves from the devastating impacts such an accident could have on their financial security. Auto liability limits legally may be as low as $25,000 per person injured, $50,000 for all those injured, and $25,000 for the property that is damaged; abbreviated as 25/50/25 (removing the “000”). There is no chance those limits will be adequate for this scenario. Usually today, the limits are 100/300/100 or 250/500/100, and then supplemented with an umbrella policy. For the common accident those base limits will likely be adequate. But when one or more people sustain serious injuries, either the Umbrella policy will be needed, or you can watch your personal assets evaporate.

In the scenario above, assume the jogger does survive after undergoing months of hospitalization, rehabilitation, and lost income.  To simply pay the medical costs and lost income would likely exceed the $250,000 auto liability limit many of you currently have. Now add to that pain and suffering, lack of consortium, decreased future earnings capacity, and other components of such a loss; the resulting settlement could be $750,000 or more.  If you haven’t got an umbrella policy, the $500,000 difference between the $250,000 auto insurance limit and the final loss settlement will come from dissolving your assets.  They will take your bank accounts, stocks, bonds, investment property, college funds, retirement funds, and will “attach”(place liens on) your home and future income.  Because bankruptcy is generally not allowed for such situations, this “accident” could leave you and your family in financial ruin.

Too often we are lulled into a false sense of security because: we have insurance, we’re safe drivers, we don’t do wild and crazy stuff. The problem comes when we fail to evaluate if the limits chosen are adequate for the potential losses our activities could result in. It’s hard for the average person to imagine really needing more insurance, and even tougher spending the extra money that it costs. When people decide to increase their liability limits, there is usually an event that prompted this change.

Some people may decide to increase their auto liability limits because they have a teenage driver. Some will increase their homeowner policy because they have a swimming pool and kids. Having appropriate limits for your high exposure activities is important without losing sight of all the respective policies your have and the loss potentials. You may have separate policies for your homeowner, auto, boat, vacation home, rental property…  Each of those policy limits apply only to the liability intended by the respective policy. They do not combine to collectively give you a larger pool of money to draw from following a loss. That collective pool is provided through the purchase of an umbrella policy.

Have you ever been walking on a stormy day under a sturdy umbrella and notice how others are running past you trying to minimize the adverse impact of the weather. The bigger the umbrella you are holding corresponds to your level of protection against the elements. It may not prevent you from experiencing any discomfort, but that umbrella sure does determine how wet you end up.

That analogy applies closely to insurance. Like the umbrella that helps protect you in a storm, a personal insurance umbrella provides a canopy of protection over all of your individual insurance policies.  You could increase individual policy limits to meet a specific exposure, but a more cost effective option is usually achieved by purchasing an umbrella policy. Usually sold in $1 million increments, it adds an extra layer of protection for all of your liability related insurance policies.

The cost of an umbrella has many variables that affect the price. Those variables include: the number of cars on the policy, the age and number of drivers, the number of properties owned, and your family’s violation and loss history.  A family that owns their home, has 2 cars, and 4 drivers can expect their umbrella to cost about $20 a month.

Can you afford not to buy an umbrella?