Close-up: Umbrella Policy

Physician's Money Digest, August 2007, Volume 14, Issue 8

Umbrella Policy: n. An insurance policy that provides coverage for losses above the limit of an underlying policy or policies, such as homeowners and auto insurance. It may also offer coverage in some areas not provided for in either of the above-mentioned policies.

At least once in your life, you've likely looked out the window on a rainy morning and noted dismally, "Nice weather, if you're a duck." Chances are, unless you're Gene Kelly, you refrained from heading out to sing in the rain while dancing up and down your block. In fact, it's unlikely you ventured out at all unless you had an umbrella.

An umbrella insurance policy serves a similar, but even more important, role. If you get wet in the rain, you can towel off, hang your wet clothes on the line to dry, and be good as new in no time. But if that downpour comes in the form of an insurance claim that exceeds the limits of your homeowners, auto, or other type of policy, it could take years, if ever, before you dry out.

Understanding the Coverage

An umbrella policy works for you in exactly the same way a standard umbrella functions—only from a financial rather than a physical perspective. An umbrella policy protects you and the assets you've accumulated by virtually sitting on top of your existing insurance policies to provide extra protection against adverse situations.

Think of an umbrella policy as an electrical extension cord. You need to plug in an appliance, but the cord is too short to reach the electrical outlet in the wall. An extension cord extends the length of the appliance's regular cord so it can reach the outlet. An umbrella policy extends the coverage of many of your standard insurance policies.

That's important, because in reality, we live in a highly litigious society. As a physician, you're a likely target of lawsuits because it's assumed you have a significant bankroll in the vault. And it could easily happen. You could be sued under your auto policy if you were involved in an accident while traveling between your practice and the hospital. If someone slipped while on your property, either indoors or outdoors, you could be sued under your homeowners policy.

Without an umbrella policy, your savings and all of your assets could be wiped out in the blink of an eye.

How Umbrellas Function

An umbrella insurance policy goes to work once you've exhausted the funds in your standard policy, be it homeowners or auto. So, if you're involved in an automobile accident and the liability coverage on your auto policy is limited to $300,000, the umbrella policy will kick in once you reach that threshold.

How much umbrella insurance you have is often up to you. You can purchase coverage of $1 million, $2 million, $5 million, or more. And if you're thinking, "Why would I need more than $1 million of coverage?" consider several things. First think about your assets—how much are you worth? Now think about future income you might earn. It could easily be jeopardized depending on the size of the judgment. That might impact you and your heirs for years to come.

However, umbrella policies can vary from state to state. According to an article on the Insure.com Web site, depending on where you live, umbrella coverage might not cover you for certain exposures. For example, "many policies won’t pay for punitive damages, which are generally used to punish people for their conduct." Claims arising from a business endeavor may also be excluded.

Therefore, be sure to talk with an insurance professional to make sure that the umbrella policy you're purchasing offers adequate protection. Otherwise, you might get left out in the rain.

The Cost for Peace of Mind

Despite stories to the contrary, umbrella policies are reasonably priced. According to an article on the Insure.com Web site, you can purchase a $1-million or larger policy for less than $200 a year in premium. Each additional million dollars of coverage adds about $50 to $75 in premium. In addition, most policies are sold with a deductible of between $250 and $1000.

Even if a lawsuit is dismissed and you are cleared of financial responsibility, you're still likely to have incurred significant attorney fees defending yourself. In that case, your umbrella policy will pay for the lawyer and related defense costs. And if you’ve ever been involved in a lawsuit, you know how those costs can quickly add up.

Be aware, however, that some insurance companies will insist that you are insured through them on both your auto and homeowners policies before they will issue an umbrella policy. The insurer may also request that the liability limits of your home and auto policies are of a specific amount.

Pop Quiz

1) Umbrella policies offer extended coverage on which insurance policies? a) Auto b) Homeowners c) Both d) Neither

2) Umbrella insurance can be purchased in what amount? a) $1 million b) $2 million c) $5 million d) All of the above

3) What should you consider when calculating how much umbrella coverage to purchase? a) Current earnings b) Future earnings c) Total assets d) All of the above

4) How much in annual premium will a $1-million umbrella policy generally cost? a) $100 b) $200 c) $300 d) $1.99 after mail-in rebate

5) How much will each additional million dollars of coverage generally cost? a) $25 b) $50 c) $100 d) $1.38 plus tax

Answers: 1) c; 2) d; 3) d; 4) b; 5) b.