Yes or No: Should You Get an Umbrella Insurance Plan?

To understand umbrella insurance, it is useful to start with more basic insurance coverages that are familiar to most people.

Most people are familiar with car insurance and home owners insurance. Both of these types of insurance provide two forms of coverage. Both of these kinds of insurance can cover losses that you incur as the owner of property. For example, if a tree branch falls on the roof of your house and then rolls off onto your car, your home owners insurance will reimburse you for the damage to your roof, and your auto insurance will reimburse you for the damage to your car.

However, both car insurance and home owners insurance cover liability as well. Liability arises when you are the cause of damage to another person or another person's property. With auto insurance this typically arises from an auto accident that is determined to be your fault. For home owners insurance, liability typically arises when someone is injured on your property or by your property. This liability coverage is limited to a set dollar amount based upon the policy purchased.

What happens if there is a situation in which your liability exceeds these preset limits?

The answer to that question explains whether or not you need to buy umbrella insurance policies, yes or no.

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.