Why Everyone Should Consider an Umbrella Policy (Part II)
So it’s easy to understand why someone with sizable assets to protect needs an umbrella policy, but let’s get back to that misconception I mentioned earlier. What if you are an average middle class worker with an annual household income of $50,000, a house with a mortgage, two cars with payments, a couple retirement accounts, and a few thousand dollars in the bank? If this were the case, do you really need umbrella insurance?
After all, if you have up to $250,000 in liability coverage on your auto and homeowner’s policies, this would seem like enough to protect the assets you do have. But the flaw in this line of thinking is the assumption that a plaintiff in a civil lawsuit will only go after your net worth or policy liability limits, whichever is greater.
In fact, a plaintiff may indeed decide to sue for $1 million in damages even if your policy limit is only $250,000. And if a court finds you liable, you will be responsible to pay the additional $750,000 out of your own pocket, this on top of whatever legal costs you incur defending yourself.
If you are unable to pay, it can be registered as a civil judgment against you, meaning the plaintiff may employ other means of collection, such as a lien against your home, bank account seizure, and/or a wage garnishment. It goes without saying that such a scenario can wreak a lot of havoc on your financial (and personal) life. At this point, bankruptcy may be the only way out.
On the other hand, if you spent the $200-$400 annually for a $1 million umbrella policy, it would protect you for the additional $750,000, and you would be free and clear from this incident financially.
Though umbrella insurance may not be for everyone, it is an often overlooked policy that is well worth considering for a vast majority of us – even if our last name is not Trump or Rockefeller.