Being caught in the rain is never fun. I grew up in Aberdeen, Washington where it rains over 80 inches a year, and I spent the majority of my adolescents with the bottom of my jeans soaking wet. I never understood how Gene Kelly could be so happy singing and dancing in the rain. Nevertheless, over the years I’ve come to realize that the only way to live in the rain is to always carry a good umbrella. The same can be said for life’s rainstorms. During difficult times it’s good to have an umbrella or more specifically an umbrella insurance policy.

What is an Umbrella Insurance Policy?
We’ve all heard the unfortunate stories of car accidents where an individual collides with another and causes serious injury or even death. The individual who caused the accident may have been acting prudently, but nevertheless produced the accident. As a result a lawsuit ensues and a judgment is awarded on behalf of the victim. A judgment in the above type of case can range from a few thousand dollars to millions depending on the incident’s severity. The individual’s insurance policy can cover up to the policy limits, but if the judgment reaches beyond that the individual becomes personally liable for the difference.

This is where the umbrella insurance policy comes into play. The policy is an extra layer of coverage or protection beyond your typical auto insurance and home insurance liability coverage.

In the example above, assume the judgment amount awarded totaled $500,000.00. The individual who caused the accident had the minimum liability coverage required by the State of Washington, which is 25/50/10. This means the policy will cover up to $25,000.00 for bodily injury or death to one person, $50,000.00 total for all persons injured in a single accident, and $10,000.00 coverage for damage to property. 1 As a result of the judgment the insurance company pays $35,000.00 ($25,000.00 + $10,000.00), while the remaining $465,000.00 is to be paid by the individual personally. If the individual does not have an umbrella policy they will have to pay the remaining judgment amount using personal assets, which may cause them to lose everything. On the other hand, if the individual has an umbrella policy in place, that policy would cover the remaining judgment amount, thus saving the individual from possible financial ruin.

Who needs an Umbrella Insurance Policy?
Many people feel that an umbrella insurance policy is only for the wealthy. This couldn’t be further from the truth. First, an umbrella policy is relatively inexpensive and affordable.

Second, the average individual is more at risk of losing everything in the event of a major accident. For instance, if a $1 million judgment is entered, an individual with a net worth of $500,000.00 will lose everything and still not be able to completely satisfy the judgment. Whereas a wealthy individual with a net worth of $10 million will only lose 10 percent of their wealth. Relatively speaking the same judgment has a far greater impact on the average person than a wealthy person. Based on its affordability and impact on saving an individual’s wealth, an umbrella policy is perfect for all individuals, not just the wealthy.

What does the Umbrellas Insurance Policy cover?
As stated earlier, an umbrella insurance policy picks up where the auto insurance and home insurance coverage stops. Generally, most umbrella insurance claims are related to car accidents. But they do cover incidents that happen at home. For instance, your child’s friend gets hurt bouncing on your trampoline. Your umbrella policy will cover these damages. In addition, an umbrella policy can protect you against lawsuits for slander or defamation of character. Although very uncommon, they do occur and are very costly.

Finally, one of the most important features of an umbrella policies coverage is its ability to pay all costs and expenses related to the lawsuits. There are instances, where an accident occurs but a judgment is not awarded. In these instances, you still are responsible for your legal fees, which can be significant. With an umbrella policy the insurance company will cover these costs.

In conclusion, don’t let rain ruin your day. Consider getting an umbrella insurance policy so that you’re not left wet and miserable in the event of an unexpected rainstorm. You should consult with your financial planner and insurance agent to determine how much coverage you need, or whether your current policy adequately meets your needs. Be prepared and don’t let the rain get you down.

1 Washington State Department of Licensing. “Getting a Driver’s License: Mandatory Insurance.” Accessed January 8, 2014, http://www.dol.wa.gov/driverslicense/insurance.html.
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