Everyone buys insurance. You have to if you drive or own a home. It's a good idea even if you don't. But how do you know how much insurance to get? There's no sense in paying for insurance you don't need, but you want to make sure you're covered.
There are two types if insurance - covering something you own and covering yourself for liability. Insuring your own belongings is pretty straight forward. Is you car worth $20,000? Then you should probably insure it for that amount. There are variables in this kind of coverage. What deductible are you willing to pay in the event that a loss occurs? Is it covered for its depreciated value or full replacement value? How can you prove the value of something that was lost? All of these questions are answerable before a loss occurs. We don't always go through the steps we should until it's too late, but we can.
The second type of insurance is liability insurance. This is where it gets dicey. There's no way to know how much you could be sued for if you cause damage to someone else. If you rear end someone, you're responsible for the cost of getting their car repaired. Did you hit a 10-year-old civic or a brand new Porsche? If you could avoid hitting an expense car, you'd avoid the accident altogether. What if you are the person who caused a 10 car pileup?
Worse than that is the possibility that someone could be hurt or killed. Damage to people is far worse than damage to property - emotionally and financially. If someone gets hurt and it's your fault, you could be held responsible for medical costs, lost wages, and even pain and suffering. Somehow the courts manage to put a price tag on that, but I sure don't know how. And the amounts can be astronomical.
If you are found liable and you don't have enough insurance, you could be wiped out financially. The court can take your assets to pay the debt, and if that doesn't cover it, you'll continue to pay from future earnings.
So how can you possibly protect yourself from such a huge unknown? Umbrella insurance was designed especially for that purpose. Here's how it works. You have auto insurance and homeowner's insurance policies. On top of that, you can buy an umbrella policy which covers any loss above the limits in those policies up to the amount of the umbrella policy. Let's say your homeowner's insurance covers up to $500,000 for one accident, but you're liable for $750,000 worth of damage. Your homeowner's insurance pays the first $500,000 and the umbrella policy covers the other $250,000.
You can buy an umbrella policy that covers you up to $1 million to $5 million. Some companies even offer policies that cover up to $10 million. It's surprisingly inexpensive for so much coverage. Why? Because claims are so rare. The chances that you'll have some kind of claim on your auto or homeowner's insurance policy during your lifetime are pretty high. Claims are only made against umbrella policies in the worst cases.
The next time you're renewing your auto or homeowner's policy, ask your agent to tell you how much an umbrella policy would cost. It might make all the difference should the worst ever happen.
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