Do I Need Umbrella Insurance?
The primary function of umbrella insurance is to cover additional liability beyond that which is covered by standard home owners insurance and auto insurance. For example, say you are found liable for an incident that is covered by the liability coverage of your home owners policy. Let's say that the amount of total liability is $800,000. The home owners insurance policy will pay out up to its established limit. If the home owner in this case has $300,000 of liability coverage with their policy, then they still owe $500,000.
An umbrella insurance policy would then kick in and pay up to its established limit, typically $1 million.
So, yes or no: Should you get an Umbrella Insurance Plan?
The answer depends upon your financial situation. More specifically, it depends upon how many assets you have. In the above example, an average person without substantial assets would have no means of ever paying off the additional $500,000. Cases often settle for the maximum amount of insurance coverage for this reason.
A person whose assets do not exceed their current liability coverages should not incur the added expense of an umbrella policy.
However, someone who does have substantial assets can be forced to use those to pay the remainder of the liability. For example, if the homeowner has a $500,000 investment account, they can be compelled to use those funds to pay the remainder of the judgment. Needless to say, this could wipe out a lifetime of savings. (Special rules apply to retirement accounts, however.)
Therefore, you should buy umbrella insurance if your assets exceed the amount of your liability coverage limits in order to protect your sizable assets from liability.