Homeowner's Insurance: Buying an Umbrella Policy
An umbrella policy is supplemental insurance, which means that coverage kicks
in when your basic policy has paid its limit on your claims.
While you may be confident that you won't face a large claim, an umbrella
policy is useful in protecting you from potential financial catastrophe.
Say you have a basic homeowner's insurance policy with $500,000 of coverage
for dwelling and property damage. Any amounts that exceed that claim limit
would have to be paid by you.
If your $1 million home burns down, you would have to sell some of your assets
to help rebuild your home. Worse, if these assets were in tax-advantaged
accounts such as IRAs, you'd likely face income taxes and penalties.
If you have a mortgage loan, it's likely that your home is insured for its
replacement cost. However, while your home is likely to be fully covered, you
may not have the same protection in liability coverage. A liability lawsuit
against you could potentially be a major drain on your wealth. That's where
an umbrella policy for excess-liability coverage may be useful.
Umbrella insurance is sold as a separate policy from your basic policy. The
Insurance Information Institute estimates that $1 million of excess-liability
coverage costs between $150 and $300. Each additional $1 million of coverage is
less than $100. The larger your basic liability limit, the less
excess-liability coverage you need and the lower your premium for excess
coverage.