What is an Umbrella Policy?

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  • 0:00 Definition of Umbrella…
  • 1:02 Characteristics and Uses
  • 2:38 Umbrella Insurance…
  • 3:40 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson, we will review the distinguishing characteristics of an umbrella insurance policy and how it works as a supplement for other kinds of insurance.

Definition of Umbrella Policy Insurance

John has had an excellent year; he got that promotion at work he was aiming for and was able to close on his first home. He even had some money left over to pay cash for his wife's new car. Each January, he reevaluates his financial situation and tries to plan for the year ahead. With all these positive changes in his net worth, he realizes he now has more assets that someone could come after in the event he was sued. An umbrella insurance policy might be a useful asset protection tool. Let's take a look at umbrella insurance and see what it does and how it works for John.

Umbrella insurance is a supplemental insurance product that provides coverage above the limits of other existing insurance policies. These policies also cover special situations that are usually excluded from other policies, such as if John were sued for libel, slander, or false arrest. The umbrella insurance policy begins paying for claims once the underlying coverage is maxed out.

Characteristics and Uses

Let's look at the specifics regarding the characteristics and uses of umbrella insurance now.

Let's first look at coverage in excess of underlying limits. Let's say John's homeowner's insurance carries a $500,000 policy, but he carries a $1,000,000 policy on his car insurance. John decides to purchase a $2,000,000 umbrella insurance policy. If John was liable for a $750,000 lawsuit involving his homeowner's insurance, the umbrella policy would cover the $250,000 above the homeowner's coverage. If John was responsible for an $800,000 auto accident, the umbrella policy would not pay for the claim since the underlying auto insurance liability limit is sufficient to cover the damages.

Now let's look at the coverage for exclusions from other policies. John's rising star in his job and wealth make him more of a target from an asset protection standpoint. That is to say that in our society, people are more likely to sue him for real or imagined situations because he has assets to go after. Asset protection is a planning process that keeps a person from coming after someone's personal assets, like a house, car, or bank accounts in the event of a lawsuit.

John could be sued for slander or libel, or the oral or written statements that cause damage or injury to another person. Someone might sue him for shock, mental anguish, or something completely frivolous. These types of lawsuits are not covered under typical insurance products. An umbrella policy provides coverage in these cases up to the limit of the umbrella policy.

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