Homeowners Insurance: What is an Umbrella Policy?

By Compuquotes Team on June 29th, 2008
Homeowners Insurance

An umbrella policy is an insurance policy that covers claims that are in excess of the coverage under your homeowner's or automobile coverage. Before you purchase an umbrella policy you will need to have both an automobile policy and a homeowner's policy from the same insurance company. Both of these policies must have the highest liability that the insurance company provides. Once you have reached these limits, you can purchase an umbrella policy.

An umbrella policy takes affect after the limits on your homeowner's or auto insurance policy are reached. The deductible for the umbrella coverage is the limit on your other insurance policy, for example, if the limit on your homeowner's policy is $250,000, then the deductible on your umbrella coverage is $250,000. This leaves uninterrupted coverage from the time you pay your initial deductible until the claim is paid.

Umbrella policies are typically inexpensive. You may find that a million dollars worth of coverage is a few hundred dollars a year. The reason that an umbrella policy is so inexpensive is because they are not used that often. However, when you find yourself in a position of being sued for exorbitant sums, an umbrella policy becomes priceless.

  • Who Needs an Umbrella Policy?

Umbrella policies are so inexpensive that it makes sense for anyone to purchase one. In particular, if you have a high risk of exposure, for example, you have a swimming pool or motorbikes, or even a teenage driver, you may want to consider an umbrella policy.

It may seem impossible that you will ever need a million dollars or more in insurance coverage, but, a serious injury on your property, or an automobile accident that involves several people, can quickly reach the limits of your traditional insurance coverage. With a case that goes to a jury trial, all bets are off, awards can be tremendous, and once your traditional policy limit is reached you are responsible personally if you do not have an umbrella policy. Even if the award is more reasonable, an umbrella policy will help pay court costs.

  • Shopping for an Umbrella Policy

If you decide to purchase an umbrella policy, the shopping process is relatively simple. Because an umbrella policy must be purchased with the same company that you currently have your homeowner's and automobile policies through, and the insurance company will require that you reach the limits on those policies before you can purchase an umbrella policy, there is not a lot of choice when shopping for an umbrella policy.

One thing to consider when shopping for an umbrella policy, is how much is enough. While a million dollars may seem more than adequate, the coverage is so affordable it often makes sense to raise the limit to two or three million. You will be surprised at how little this affects the premium. Regardless of what choice you make when purchasing an umbrella coverage, it is a good decision.

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