The must-know facts when buying umbrella insurance

Umbrella insurance is another name for personal liability insurance. It provides an individual coverage when the liability limits on his or her existing policies have been exceeded as a result of claims.

How to determine if you need umbrella insurance protection

Do a risk assessment. Analyze the chances of you getting hit by a lawsuit or an injury claim by another individual. In our guide "The 4 Ws of personal liability protection - what is covered, who needs it, why and when?" we discuss about the statistics that indicate higher risks faced by dog owners, those who own swimming pools in their backyard, and those who allow their teenage children to drive cars. In the same article we show examples that offer real life situations where people get sued because of liability claims.

After assessing the risks you face, make an inventory of your key assets; these may include your home, your cars, retirement accounts, savings accounts, and other noteworthy possessions.

Now, look at the current protection you have on your present policies - your homeowner's insurance, your auto insurance, renter's insurance (if you have one) and see the extent of liability insurance you have.

If your total assets exceed your current liability coverage on your homeowner's, auto and or renter's policies then you may not get ample protection. This is especially true if your risk assessment indicates you have a high chance of being hauled to court in case a claim is made against you for something you did or failed to do.

Determining how much coverage you need and how much you can afford

First of all, be aware that many insurers make it a requirement that their policyholders must have a minimum of $300,000 on their homeowner's plan and a separate $250,000 minimum coverage on their auto insurance before they are allowed to get umbrella coverage.

Also, this added coverage may cost you extra, as you may have to pay higher premiums on the auto and homeowner's policies. The premium on the umbrella policy alone may offset you by $150 or more per annum for a $1 million coverage. Coverage that exceeds $1 million will cost around $50 more per year.

Now, when setting the level of coverage that is right for you, go back to the first step where you made an assessment of your risks, assets and the current level of protection you have on your existing policies.

Next is to establish the value of your assets in the future - will this increase or decrease?

Now, match the amount of risk exposure you are facing with level of coverage available to you. Most umbrella policies start at $1 million coverage. If you think this is not sufficient, get one with a higher coverage.

Determining the right type of coverage

The following are the typical questions that an insurance agent will ask that will help determine the type of coverage you need. By going over these, you get to have an idea before you go shopping for a plan.

  • Aside from your car, are there any other vehicles in your possession like motorcycles, ATV quad bikes, Jet Ski?
  • Are there drivers that have physical or mental impairments in your household?
  • Do you have a farm?
  • Are there employees who work from your home?
  • Are there properties, which you do not own but you look after, and whose value is beyond $1,000?
  • Are there businesses or business-related activities conducted in your house or in any of your properties?
  • Do any of your present policies have exclusions for certain events?
  • Do you have drivers in your family who are under 25 years old and are covered by your current auto insurance policy?
  • Are there vehicles like aircraft or watercraft, which you own, hire or lease on regular basis, which do not have liability insurance?
  • Do you have properties that are not covered by liability insurance?

How to shop and save for a policy

  • Make an inventory of the insurance policies you have on your home and on your vehicles. If you have a renters property, include the policy you have on that asset in your inventory.
  • Have a look at the liability coverage for each of the policies you have. If you do not know where to find this, get in touch with the insurance company or agent concerned.
  • Keep the contact information of the insurers handy, as you may need it for verification purposes.
  • In many cases, you are allowed to get umbrella coverage if you have at least $300,000 liability coverage on your homeowners policy. On an auto insurance plan, you are required to have a minimum of $250,000 liability coverage.
  • Get in touch with the insurer who holds your auto and homeowners policies for an estimate.
  • Compare the estimate provided to you with what other insurance companies can offer.
  • Consider consolidating your policies if you have them with separate insurers. Besides, majority of insurers require that policyholders have their auto and homeowners insurance with them to be able to secure umbrella coverage. In addition, you can get savings of up to 20 percent by dealing only with one company.
  • Make a comparison. Look beyond the price on the policies available to you. See their coverage, deductibles, claims process, and other features.
  • Before deciding on a policy, ask the insurer how much it would cost you to increase the limits on the homeowners and auto insurance policies.
  • Consider higher deductibles. One way to save on premiums is to consider a higher deductible. However, be sure your finances would allow you to afford to pay the deductible in case something happens.

How to choose an insurance company

Look at the company's financial strength. This is reflected in the company's financial statements. Statements that reflect growth are indications that the business follows a good underwriting policy.

Evaluate services. See how the company delivers its services to its clients. Here, you should be looking at customer feedback. You can ask current clients, your friends or relatives who has had experience with the company or you can check out reviews online. It also helps a lot to see how a company is rated by agencies like A.M. Best and Standard & Poor's.

Check the department of insurance website of your state. Here you are likely to find consumer complaint ratios that reflect the amount of complaints that an insurer receives from customers.  Also, a department of insurance website usually offers good information that will guide you in selecting a good company.

Get the advice of an attorney or an agent. Especially one with experience in liability claims. A good attorney or agent should be able to provide you with their recommendations.

Mistakes to avoid when shopping for coverage

Looking only at the price. Price is not only the determining factor when choosing a policy. You need to look at the others that are mentioned in the preceding sections of this article (company's financial strength, rating, customer feedback, your own needs, etc.)

Getting a coverage that equals your assets but not exceeds them. It is advisable you get a policy that is at least 50 percent more than your overall assets. This assures you have more than enough protection.

Not checking on the gaps on current policies. Gaps in policy coverages, for example, your auto insurance and the umbrella policy, could also leave you vulnerable to financial setbacks. Whatever is the difference between these policies, you may have to pay out of your own pockets.

Not checking the small print. This is a common mistake shared by many consumers. Not looking into the details may leave you assuming that you are covered when you are actually not. Therefore, it is important you check what is written on that umbrella insurance policy.
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