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What Is Umbrella Insurance?

Umbrella insurance is a type of personal liability coverage that can protect your assets if someone sues you and is awarded an amount that exceeds the limits of your other insurance policies, such as your homeowner’s or auto insurance. An umbrella policy helps pay this excess amount, preventing you from potentially losing your savings, future income, and more.

Curious to see if an umbrella insurance policy is right for you and your family? Read on to learn more.

Umbrella Insurance Can Complement Your Home and Auto Insurance

Suppose you have homeowner’s or renter’s, auto, or watercraft insurance policy. In that case, you already have a specific amount of coverage for incidents that could leave you liable for payments to another party. However, each of these policies has coverage limits. If you’re sued for an amount exceeding your coverage limit, you’re liable for the difference.

That’s where an umbrella policy comes in. This insurance complements your existing policies by paying for damages that exceed your policy limits. While your existing coverage may be sufficient in many situations, there are some circumstances when the amount you owe could be well over your liability limits. Umbrella coverage can help protect you from this potential vulnerability.

Should You Get Umbrella Insurance?

There are several important factors to consider when determining whether you may need umbrella insurance. Purchasing coverage may prove useful, particularly if you have a high net worth or are risk-averse. However, policies come with an additional cost, which may not be worth it. 

Consider Umbrella Insurance If…

There are a variety of circumstances that can make umbrella insurance coverage attractive. If any of the following apply, this coverage could be beneficial: 

  • You have a high net worth
  • You’re a homeowner
  • You have a pool, hot tub, or trampoline
  • You own rental properties
  • You spend a lot of time driving
  • You have minor children and/or teen drivers
  • You own rare and expensive pets
  • You frequently have guests in your home or host large parties
  • You’re concerned about getting sued

You May Not Need Umbrella Insurance If…

Despite the relatively low cost, umbrella insurance may not be right for everyone. If any of the following situations apply, you may find that the extra cost does not outweigh the benefits if: 

  • Your net worth is less than your current liability coverage limits
  • You don’t want the extra expense of an additional policy
  • You don’t believe you’re at high risk of being sued

How Umbrella Insurance Works

If you’re involved in a situation that causes another person’s injury or death or damage to their property, you could be sued for a significant amount. If your existing insurance policy covers the incident and you’re found to be at fault, the policy pays out the awarded amount up to the policy limits.

If the amount the policy pays isn’t enough or the situation isn’t covered, you’re responsible for paying the remaining awarded amount. This could mean liquidating assets and/or making payments from your future earnings.

Umbrella liability insurance also covers your household members, helping protect you against lawsuits for damages caused by your children or your pets.  

What Umbrella Insurance Covers

Umbrella insurance policies cover things that other types of policies typically do not. Although umbrella coverage complements your existing homeowner’s, auto, and watercraft insurance policies, an incident does not have to involve your vehicle or property to be covered. In addition to covering personal liability, bodily injury, and property damage or loss, umbrella policies also cover incidents such as:

  • Libel
  • Slander
  • False imprisonment
  • Invasion of privacy
  • Wrongful entry
  • Malicious prosecution

Attorney’s fees and expenses related to lawsuits are typically covered under your policy. In addition, umbrella insurance also covers you regardless of where in the world the incident occurs, except for vehicles and homes you own under the laws of other countries.

What Umbrella Insurance Does Not Cover

While the coverage offered under an umbrella insurance policy is extensive, there are some limitations. For example, umbrella insurance does not cover:

  • Damage to your own property, such as your car or home
  • Damage or injury that you intentionally cause or cause through a criminal act
  • Damage or injury resulting from professional or business activities
  • Liability related to armed conflicts
  • Liability assumed under a contract you have signed

Your policy may also exclude damage or injury caused by certain high-risk activities, such as drag racing. Some types of vehicles, such as farm tractors or vehicles exceeding a certain weight limit, may also be excluded.

See It in Action

To understand exactly how umbrella coverage works, looking at a few examples can be helpful.

Example 1: You caused an accident that led to a 10-car pile up.

It’s unlikely that your auto insurance coverage is high enough to pay for the damage to all ten vehicles and the medical bills for the individuals injured in the accident.

If your auto policy includes $250,000 of liability coverage and the total damages were $1.2 million, you could owe $950,000 plus your insurance deductible. However, if you have an umbrella policy with $1 million in coverage, you’re protected from having to make the excess payment.

You still need to pay the deductible on your primary insurance policy, but since your auto insurance covered part of the loss, your umbrella policy doesn’t have an additional deductible. If you had legal expenses related to the resulting lawsuits, your umbrella coverage also pays for this.

Example 2: You or a family member wrote a disparaging Facebook post about someone and they sued you for libel.

This typically isn’t covered by other types of policies, so if the individual wins the lawsuit, you might have to liquidate assets to pay the awarded amount.

However, if you have an umbrella policy, the policy pays the plaintiff on your behalf. In this situation, since there is no other insurance coverage, the umbrella policy has a deductible, also known as self-insured retention. This is the dollar amount the insured must pay before the umbrella policy covers its portion of the claim.

Advantages and Drawbacks of Umbrella Insurance

  • Can offer significant financial protection at a low cost
  • Relatively inexpensive premiums
  • Coverage of $1 million or more
  • Protection from liability beyond other insurance limits
  • Coverage for incidents normal liability insurance doesn’t cover
  • Policy premiums add an extra annual cost
  • May need to raise the liability limits on other policies
  • May be difficult to calculate coverage needed
  • Catastrophic incidents may exceed umbrella policy limits
  • Property damage or personal injuries are not covered

While there are some potential benefits to having umbrella coverage, these policies aren’t right for everyone. Before making a purchase, weighing the potential advantages and drawbacks is important.  

How Much Umbrella Coverage Do You Need?

Umbrella policies are typically sold in increments of $1 million. The amount of coverage you may need depends on a variety of factors, including the value of the assets you want to protect, the amount of coverage you currently have, and your risk of getting sued. Evaluating each of these variables can help you determine the appropriate policy value.

1. Review Your Existing Insurance Policy Limits

Since an umbrella policy offers extra protection above your other policy limits, it’s helpful to start by evaluating your current coverage. Not only do umbrella policies require you to have auto and homeowner’s or renter’s insurance, but they also typically require a minimum liability coverage through these other policies.

For example, you may be required to have at least $300,000 of liability insurance on your homeowner’s insurance policy and $250,000 on your auto insurance policy.  

If your current limits are lower than this, you may need to increase them before buying an umbrella policy. If your limits are currently higher than the minimum requirements, you may consider adjusting them. 

2. Assess Your Assets and Net Worth

It’s common to purchase enough umbrella insurance to cover the total amount of your net worth, less the insurance coverage you already have. Your net worth typically includes your property, checking and savings account balances, investment accounts, and other assets. 

For example, if you have $3 million in assets and $500,000 in liabilities, your net worth is $2.5 million. Assuming you have $1 million in other insurance coverage, $1.5 million of your net worth is potentially exposed. Since umbrella policies are typically sold in $1 million increments, you may purchase a $2 million policy to ensure you’re fully protected.

Depending on where you live, some assets, such as your retirement accounts and your primary residence, may be protected from lawsuits. This could lower the amount of umbrella insurance you need. However, consulting with a financial professional may be helpful if you’re unsure which of your assets could potentially be vulnerable to a lawsuit. 

When determining your coverage amount, you may also consider your future earning potential since your wages could be garnished if you do not have enough assets to cover your liability.  

3. Evaluate Your Risk

Another factor that can influence your need for umbrella insurance is your likelihood of getting sued. Some factors can increase your potential liability. This includes, but is not limited to:

  • Owning property
  • Hosting large parties
  • Having a pool, hot tub, or trampoline
  • Having minor children
  • Owning a dog
  • Having a long commute
  • Being a well-known public figure

Generally, the more likely you are to be sued, the greater the need for an umbrella policy. If you have a significant risk of being sued or are risk-averse, you may choose a larger face amount.

4. Determine the Coverage Amount You Need

Once you have considered the factors above, you can use the information to determine the appropriate amount of coverage for your needs. If the coverage amount you’ve calculated falls between $1 million increments, you may consider choosing the next largest face amount, as this can help ensure you don’t have to pay for liability expenses out of your pocket.

How Much Does Umbrella Insurance Cost?

Compared to other types of insurance, umbrella coverage is typically affordable. While the rates vary depending on numerous factors, a $1 million policy generally ranges between $150 and $500 per year. As you increase coverage amounts, the additional premium also gradually declines. For example, adding another $1 million in coverage may cost you an additional $75 per year, and adding another $1 million on top of that may increase your premiums by an additional $50 per year.

Also, keep in mind that if you’re required to increase the coverage limits on your homeowner’s and auto insurance policies, this can result in higher premiums, increasing your total cost of coverage.

How to Get Umbrella Insurance

If you determine that you need an umbrella insurance policy, follow these five steps:

1. Determine How Much Coverage You Need

Begin the process by assessing your net worth, current coverage, and risk profile to determine your needed coverage. Remember that these policies are typically sold in $1 million increments, so you may decide to round up to ensure you have sufficient coverage. If you’re unsure how much coverage you need, you may also consider consulting with a financial professional.

2. Shop Around and Compare Quotes and Options

Next, it’s time to shop around for coverage. Each insurance company may have different options, requirements, and premium costs. For this reason, it’s advisable to request quotes from multiple insurers and compare them carefully.

In addition to reviewing the quotes, consider the insurance company’s reputation, reviews, and financial stability before making your final decision.

3. Select Your Preferred Insurer and Purchase the Policy

Once you’ve selected your preferred insurer, it’s time to purchase your policy. Many companies allow you to complete and submit your insurance application online.

If you work with an insurance agent, he or she can guide you through the process and answer your questions. Otherwise, you may have access to a company representative who can help if needed.

4. Pay Your Premium and Receive Confirmation of Coverage

After the insurance carrier processes your application and accepts your premium payment, they send out a confirmation of coverage. This proves that you are now covered by the policy you’ve purchased.

5. Make Time to Review Your Coverage Regularly

Since your circumstances are likely to change throughout your lifetime, it’s important to review your coverage regularly. When you do, take the time to calculate your current net worth, review your other insurance policy limits, and reassess your liability risk. This can help you make sure you remain properly covered.

Busting Umbrella Insurance Myths

There are some misconceptions surrounding umbrella insurance. Before deciding whether you need umbrella coverage, consider these common myths.

  • Umbrella policies are extremely expensive. Actually, you can typically get a $1 million policy for less than $500 a year.
  • Only wealthy people need umbrella insurance. Accidents can happen to anyone, and an umbrella policy provides extra protection beyond your basic insurance coverage.
  • Umbrella insurance can replace auto, homeowner’s, or boat insurance. Not true. Umbrella insurance is meant to complement other types of insurance. You’re typically required to have a minimum amount of liability coverage before you can purchase a policy.
  • My auto and homeowner’s insurance coverage is enough. Certain situations may create liability far greater than your policy’s liability limits. An umbrella policy can protect you from paying these costs out of your pocket. 

Putting It All Together

Depending on your circumstances, an umbrella insurance policy can be an affordable way to add an extra layer of liability protection. When considering whether this additional coverage may be appropriate for you, take the time to evaluate your potential exposure to risk and whether a portion of your net worth may be unprotected. If you decide you need a policy, request multiple quotes and compare your options carefully before making your purchase.