Umbrella and P&C Deductibles
“He who brings trouble on his family will inherit only wind, and the fool will be servant to the wise.” (Prov 11:29)
In the last two sections, we discussed two major areas of potential liability that most people assume within their Auto and Homeowner’s policies. The typical policies cap the liability that the insurance company will accept and puts it back on your shoulders.
However, Property & Casualty (P&C) Insurance companies do typically offer additional Liability Insurance policies. These are often called Umbrella Policies. These policies sit on top of your current Homeowner’s and Auto insurance policies and offer extended liability protection. You can easily add $1 to $5Million of liability protection. If your HLV is greater, then you should increase this to cover that amount.
How much would you expect an extra $1,000,000 of liability protection to cost? It’s actually pretty inexpensive, maybe $20-25/month. So why don’t more people have it?
As you can see, the income to the insurance company is small, and the risk is great. It’s not in their interest to encourage people to place this coverage.
Ironically, many people with whom we discuss these three types of property and casualty insurance have made insurance decisions that send the highest amount of premium dollars to the companies for the lowest amount of total coverage. They typically have low coverage amounts as we’ve been describing, but also have low deductibles. This is exactly what the insurance company wants! You’ll find again and again in all financial decisions that most people are doing exactly what most profits the financial institution that they are working with and these types of policies are no exception.
The deductible is the item that most drives the premium cost on your policy. If you raise your premium from $250 to $1,000, you will almost certainly cover the cost of the increase of coverage from $50,000 to $250,000. Obviously, everyone has different plans in place, but the point is to examine what you have and what you really want your policy to do….rather than setting it up to do what your insurance company wants it to do.
The insurance company wants to get the highest possible premium from you with the lowest potential risk. This is accomplished if you have low coverage maximums and low deductibles.
If it makes sense for you, you should consider increasing your auto insurance deductible to $1,000. You need to check with your current company or find one that gives better education than you’ve perhaps been getting. Sometimes, depending on what your company offers, having a different amount makes sense. For some people, they don’t have enough in savings to warrant increasing their deductible to this amount yet. If you increase your deductible to $1000, you better be ready to pay $1000 for your next accident.
We’ve had one family tell us that they get into so many accidents that they need a low deductible! So each situation is different, and there isn’t one magical answer that is always true for everyone, but hopefully this gives you enough understanding of the moving parts that you can see what is right for you.
But let me ask you this: If you were to hit a guardrail on your way home tonight and cause your car $900 worth of body damage. What would you do? Would you call your insurance company, or would you pay it out of pocket so that your rates would not go up? If you would simply pay it out of pocket, why pay for a lower deductible?
Many times we find that raising deductibles on your auto and homeowner’s policies will pay for your new umbrella policy, perhaps even saving you a little money each year.
So how much should your max coverage be on your auto and homeowner’s policies? That’s a question for your P&C Insurance company. You probably want the lowest possible coverage amount that they will allow and still issue a (much cheaper) liability policy with. Because you’re most likely to have a claim come through your use of your home or car, the policy will require you to maintain a certain level of coverage on these policies before they’ll issue a liability (umbrella) policy. Some companies offer a couple choices, and you need to analyze those options when they’re presented to see what delivers the best coverage for the lowest premium.
Do you have a specific question about your insurance? Post your question as a comment and I’ll try to give you an answer.
Photo credit: writemeg