After our discussions on auto insurance and homeowners insurance, do you feel that your coverage is adequate? If you set your personal injury liability limits at $500,000 as we usually suggest, will that be enough to cover you in a potential lawsuit? What if you severely injure or kill medical doctor who is a highly specialized in an unusual field? The truth is $500,000 may not be enough for all possible situations, which is why we often recommend people add what is known as an umbrella policy.

An umbrella policy is liability coverage designed to rest on top of your other liability coverages. It steps in to pay for liability costs you may incur once your auto and homeowners policies coverage runs out.

Umbrella policies are another great deal. It often comes in $1,000,000 increments and can cost as little as $100-$200 a year.

A good umbrella policy will not only pick up when your other coverage runs out (including legal cost), but it will also cover areas that may not be covered by your primary policies (coverage gaps). Otherwise, if you are sued for something that is not covered by your primary policies, which can happen even when you try your best to have a solid policy, everything you owe in the result of a lawsuit will be out of pocket to you.

Many people would probably do well to purchase $1,000,000 of coverage. Even if you don’t feel you need it, the second layer of protection may be worth it, especially at such a low cost. If you have a high “sueability factor” (high net worth, high income, etc.), you may want to purchase more coverage.

Things to consider

There are a few things you should think about before buying. Not all umbrella policies are the same. Many don’t have the gap coverage that is such an important feature. Don’t pay for an umbrella policy that only covers what your primary policies cover; find one that will cover all the important gaps those policies may have. Be sure to do your research first and make sure you find an insurance company that has quality coverage.

Also, in our talks of auto insurance and homeowners insurance, we’ve discussed the importance of matching your liability limits. An umbrella policy comes in only after your primary polices have reached their limits. If your umbrella policy is set to start at $500,000, but you only have your homeowners’ liability limit set to $500,000 and your auto at $300,000, you can be in trouble. If you get into an accident and the lawsuit makes you liable for $600,000, your auto policy will cover the first $300,000, your umbrella policy the additional $100,000 (kicking in at $500,000), and you personally are responsible for the $200,000 gap. So it’s very important to make sure all of your liability limits match and your umbrella policy sits directly on top.

With all of our talk about not shopping price when structuring your insurance policies, next week we wanted to spend some time discussing ways you can actually save money on your insurance.