Umbrella Policy vs. Higher Liability Limits

Protecting your financial future and stability is something everyone should take seriously, and liability insurance can play a critical role in that. Whether you’re protecting your vehicle, your home or even your boat, liability coverage can help shield you from the costs of property damage, medical bills and even lawsuits if you’re found legally responsible for an accident. But what happens when those costs exceed your policy’s limits?

There are two different paths to take if you’re worried about costs potentially exceeding the limits of your liability policy. The first is quite obvious, you could simply raise your coverage so you have higher liability limits. But there’s another option as well, which is called an umbrella policy. Both options offer increased protection, but they work in different ways. Let’s dive into those differences while highlighting their benefits and limitations.

Just about every standard insurance policy will come with built-in liability coverage, including home, auto and even renters insurance. Liability coverage represents the amount your insurer will pay if you’re found liable for damages or injury. With these standard kinds of policies you don’t have to do anything special to have liability coverage, your liability will simply be covered in the event of an accident, but only up to a certain limit.

For example, a typical homeowners policy might offer $300,000 in personal liability coverage. If the damage or injury that is covered by your policy somehow exceeds that limit, you’d be responsible for any additional costs. One way to counteract your fear of those costs exceeding your policy’s limits is to ask for a higher liability limit.

Doing so increases the maximum payout your insurer will provide under that policy, which is a relatively straightforward and simple way to boost your protection. Here are some of the benefits and limitations of higher liability limits:

• Benefits
  • Simple to manage; no additional policy paperwork necessary
  • Immediate increase in coverage; only for the specific asset covered by the policy
  • Often affordable; especially when bundled with other policies
• Limitations
  • Coverage is tied one specific policy
  • Still may not be enough in severe accidents, lawsuits
  • Does not extend to other areas of your life

While it might not be as simple as just raising your limits, an umbrella policy is a solid alternative for a few different reasons. The biggest drawback is that it is, indeed, a separate insurance policy. It provides additional liability coverage beyond the limits of your existing policies, kicking in when your home, auto, or any other liability coverage is exhausted.

To give you an example of how it works, assume you have an auto policy that covers up to $300,000 but you just caused a multi-car accident with more than $600,000 in damages. Your standard automotive policy will cover its normal limit, but then your umbrella policy will kick in and cover the rest of the damages. This saves you from having to pay anything out of pocket!

An umbrella policy will typically start at $1 million in coverage, but they can go much higher than that. Furthermore, these policies cover broader scenarios, including things like libel, slander, false arrest and even some international incidents. Here are the benefits and limitations:

• Benefits
  • Covers multiple policies under one umbrella; auto, home, boat, etc. all covered under this one plan, instead of raising the limits of each policy individually
  • Provides high limit protection; crucial for major lawsuits or claims
  • Wider coverage for personal situations; things not covered by standard policies
• Limitations
  • Requires underlying policies to meet minimum coverage thresholds
  • May not cover business-related liability; unless specifically added
  • Slightly more complex to set up, manage

Choosing which option is the right path for you to take will ultimately come down to your lifestyle, assets and risk exposure. If you need help determining which one is best for your situation, we’d be happy to help here at Glover Family Independent Insurance. Just give us a call to discuss your needs and we’ll get to work!