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What Is Umbrella Insurance and When Is It Needed?

Umbrella insurance is designed to work hand-in-hand with your homeowners insurance, adding more protection when liability limits aren’t enough.

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Umbrella insurance is designed to work hand-in-hand with your homeowners insurance. It functions like an umbrella over your other insurance policies, adding more protection when liability limits aren’t enough.

A standard homeowners insurance policy will have liability coverage with a limit. That means if you’re at fault, or liable, your homeowners policy is going to pay up to the maximum. If the expenses exceed that, then you’re responsible for paying the rest. When you have umbrella insurance that policy will step in and cover the extra expenses.

Umbrella Insurance vs. Standard Home Insurance

Most people know that a standard homeowner policy is there to protect your home and your property. There are also two kinds of liability coverage baked into homeowners insurance—bodily injury and property damage.

If someone is injured on your property, let’s say they slip on ice and fall, then your homeowners insurance will help with expenses—that’s the bodily injury portion of your policy.

The property damage portion comes into play if you or a family member damages someone else’s property. For instance, you go to a party at a friend’s house and your new puppy tears up their couch. Your homeowners will help pay for the damage.

The problem is when the damage exceeds the amount of your homeowners policy. It’s easy for a slip and fall or any bodily injury claim to become very expensive. Especially, if you’re adding in pain and suffering and lost wages. If you have umbrella insurance, once your homeowners pays up to the liability limit, then the umbrella steps in.

What Does Umbrella Insurance for the Home Cover?

At the surface, umbrella insurance works as a supplement to your homeowners coverage. This means a lot of the benefits of this coverage are related to your homeowners policy and events that surround your home or your actions in someone else’s home.

Above Liability Limits

The primary purpose of umbrella insurance is to protect your assets if there is damage that exceeds your current liability coverage. This insurance applies to limits on your homeowners, auto policy, and any water vehicle or boat insurance you have, too. It can also be used if you have renters insurance.

If you’re being sued in a liability case, not only will your umbrella policy help with the additional damages you’re assessed, by it may also cover some legal expenses you incur fighting the suit.

One of the benefits of an umbrella policy is that it is a personal policy that, in effect, goes with you. It goes beyond the home and is there if something happens when you’re in your car, or if you’re on your boat. It can also step in if you’re in someone else’s home in certain situations.

What Doesn’t Umbrella Insurance for the Home Cover?

While umbrella insurance offers a lot of protection, there are still some types of damages that it does not cover. A key element of this insurance is that it’s additional liability coverage, meaning it pays for the damages you cause to others or expenses related to an event that was your fault.

The following expenses are not covered by umbrella insurance.

  • Damage to your belongings
  • Business losses
  • Written or oral contracts
  • Criminal acts
  • Intentional acts
  • High-risk activities (i.e. drag racing, improper vehicle loads, etc.)
  • Communicable disease transmission
  • War or armed conflict damage
  • Your healthcare expenses

How Does Umbrella Liability Insurance Work?

If you’re familiar with your homeowners insurance, you’ll know that Coverage E in your policy protects you in the event of personal liability. This is for situations where someone says that they’ve had a bodily injury or property damage as a result of something that’s your fault.

This is the portion of your homeowners insurance where umbrella coverage is particularly applicable. When your Coverage E has reached its limits, you are expected to pay for any expenses above and beyond that. With umbrella insurance, you won’t pay it out of pocket, your policy will pay.

While each policy is different and can be adjusted, the standard homeowner’s policy basic limit for liability to property damages or injuries is $300,000. That amount is designed to be adequate in most situations but there can be expenses that exceed that amount.

There are additional protections with an umbrella policy that go beyond Coverage E and make this type of insurance particularly appealing to some.

Libel or Slander

If you’re quick to pop on social media and slam someone or a business, you might be setting yourself up for a libel or slander suit. This is a growing area of concern and umbrella insurance can offer some protection if you’re found at fault.

Dependent Children

It’s important to note that an umbrella policy extends beyond you to include your family. This can be helpful, especially with teens who are learning to drive and are prone to internet libel and slander.

Rental Properties

If you’re a landlord, umbrella insurance will raise your liability coverage if something happens to a third party on your property. This is only for situations where you are liable, but it can be very useful if someone falls or is injured in another way.

Umbrella coverage is part of a comprehensive home insurance policy that goes beyond minimum or standard amounts. Adding it to your current policy will add more to your premiums, but umbrella insurance is considered relatively inexpensive—a few hundred dollars a year.

In most situations, there isn’t a deductible because at that point your other policy has stepped in and paid all that they will. If you’re involved in a case where you’re at fault but your homeowner’s or auto insurance doesn’t apply, then there will be a deductible before your umbrella policy covers.

If you’re interested in getting an umbrella policy, connect with your insurance agent to see if there are additional steps involved. Most insurance companies will require that you carry the maximum liability on your homeowners and auto insurance before you can purchase an umbrella policy. But there are often significant discounts if you bundle your policies under the same insurer.

Benefits of Umbrella Insurance

  • Extra liability coverage – adds coverage if amounts exceed your current policies
  • Legal defense costs are covered if you’re sued for certain liability cases – can help pay for expensive lawyers or even provide you with lawyers
  • Covers some libel and slander cases – additional coverage that isn’t a part of your other policies
  • Can cover false arrest charges – if this situation arises, you’ll want the legal defense and the insurance coverage to protect yourself
  • Extends to cover home, auto, and boat – an add-on that doesn’t just fit one type of insurance
  • Extra coverage for landlords — very useful for landlords who want an added layer of protection
  • Inexpensive – for the amount of money an umbrella policy will pay out, it’s inexpensive, in the low hundreds

Disadvantages of Umbrella Insurance

  • Need to already have home/auto/property liability insurance – it’s a supplement to existing insurance
  • Might have to raise limits of current insurance policies – will need to have maximum coverage in your standard policies first
  • Doesn’t cover your own property damage or injury expenses – you’re paying extra for damages incurred by others

How Much Umbrella Coverage Do You Need?

The biggest factor in determining if you need an umbrella policy is what your risk level is. People who have a significant amount in savings might want to protect those assets by having an umbrella policy. If you have teen drivers who are apt to cause an accident, then it might be a worthwhile expense. And it’s not just kids who can create liability issues, certain breeds of dogs are considered more dangerous, prompting you to spend a little more “just in case.”

A good goal is to have enough insurance to cover the value of your taxable assets and any homes beyond your primary residence. This only needs to be a rough estimate because umbrella coverage is sold in increments of $1 million. You don’t need to consider your primary home, employer-sponsored retirement funds, and/or $1 million in IRA savings. These assets cannot be taken for liability suits.

How Much Does Umbrella Insurance Cost?

The average cost for umbrella insurance is between $150 and $350 a year. That leaves a lot of wiggle room which can be affected by the state you live in, how much property you’re insuring, the number of people on the policy, and if you’re bundling for a discount.

The estimate of $150 to $350 a year refers to the first million. If you feel you need more coverage, you can expect to pay between $50 and $75 more per year for each additional $1 million.

If you have an umbrella policy, you may pay more in premiums because you’re required to have your other foundational policies at the limit. For example, if your homeowners has a maximum of $300,000 for liability issues but yours is set at $250,000, you’ll have to increase your maximum, which means your homeowners premiums will be more per month.

Should You Consider an Umbrella Policy?

If you feel like you’re at risk for a liability issue or you’d like to add some protection, it comes down to evaluating cost versus risk. Some of the risks that can make an umbrella policy a good idea include:

  • You have a swimming pool
  • You have a trampoline
  • You have a large amount of savings or assets
  • You own investment property
  • You’re a landlord
  • You own a business
  • You ski, surf, or hunt
  • You own a dog that falls into the higher risk category
  • You volunteer, coach youth sports, or are on a board

If any of these apply to you or if you’d just like that peace of mind, then an umbrella policy offers additional protection for your assets.