I met with a client earlier this week for coffee at a Starbucks in Frisco. One of the topics she wanted to discuss was her and her husband’s umbrella insurance policy. Her two questions were did they have enough coverage and what factors influenced the policy’s rate. I thought they were excellent questions and should be addressed as separate posts in our blog.
Umbrella insurance is an excess liability policy that adds to, or extends, the underlying liability coverage found on an auto, home, or other personal insurance policies (motorcycle, RV, secondary home, etc.). For instance, if someone has bodily injury limits on their car insurance policy of 250/500/100, an umbrella policy with $1 million in coverage extends these limits to 1.25/1.5/1.1 million. The purpose of an umbrella is to provide a financial firewall to protect an individual’s or family’s financial assets in the event of a lawsuit (see http://22.214.171.124/~wiseinsu/whats-an-umbrella-policy-who-needs-one/).
One of the questions I’m asked when discussing umbrella insurance with someone who’s never had one is, how much does one cost. There are a number of factors that influence an umbrella’s cost.
General Factors: The three general factors that shape an umbrella policy’s cost are the amount of coverage, a person’s credit, and their profession. Generally speaking most umbrella insurance will start with $1 million in coverage and increase in million dollar increments up to $5 million. The greater the amount of coverage, the more a policy costs.
Credit also plays a part in determining the cost, as it does with home and car insurance policies in Texas and other states. People with higher credit scores pay a lower rate for an umbrella policy than people with lower credit scores.
An individual’s profession and civic involvement impacts the rate for umbrella insurance. Professional athletes, actors, musicians, authors, CEO’s, physicians, lawyers, and other’s in the public eye will pay more for an umbrella than someone who is in a less visible profession. Membership on a board of directors, either corporate or civic may also cause the premium to increase.
Home Related Factors: There are three home related factors that influence the umbrella policy’s premium including, the underlying personal limits on a home policy, the number of homes, and type of homes. Many insurance companies require a minimum of $300,000 in personal liability coverage on the home policy while others require $500,000 to write an umbrella. Those that only require $300,000 in personal liability coverage provide a discount when the homeowner carries a personal liability limit of $500,000.
The number and type of homes also influences the rate. People with multiple homes (primary, vacation, etc.) pay more than someone with only one home. People who own rental property pay more than those who don’t own investment property too.
Home insurance claims don’t usually influence the premium either way, unless there’s been a liability claim. This type of claim may impact the rate, but whether it does or not, depends on the company’s underwriting guidelines.
Auto Related Factors: There are at least five auto related factors that impact the umbrella policy’s cost. People with higher underlying auto limits usually qualify for a lower rate than those with lower limits. The presence of teen drivers, number and type of vehicles also impact this. More drivers, especially teen drivers, affect the umbrella insurance rate.
The more vehicles a person owns, whether cars, motorcycles, RVs, or watercraft, the greater the exposure and the more an umbrella costs. Vehicle type also influences the rate. A person who drives an Acura, Infiniti, or Lexus will pay less than someone driving a Bentley, Ferrari, or Lamborghini. In addition, people who own boats, jet skis, or RVs will pay a higher rate than those who don’t.
Driving record also factors in. People with violations, such as speeding tickets and other moving violations, or accidents will pay more for an umbrella policy than someone with a clean driving record.
These factors are used by insurance companies to compute the annual rate for an umbrella insurance policy. The more factors there are, the more expensive the umbrella policy will be, while those with fewer factors pay less. Regardless of whether or not any of these factors exist, if you fit the profile of someone who should have an umbrella, it’s still less expensive than being sued!
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