What's an Umbrella Policy and Do I need One?

Some people need more liability coverage than a typical car insurance policy can provide. For these people, an umbrella insurance policy can be very useful.

umbrella insurance policy

In our society, it’s raining lawsuits. Purchase an umbrella insurance policy to protect your resources from a legal monsoon.

If you accidentally cause property damage or bodily injury, your home, renters, or auto liability coverage protects you from the costly fallout. But the cost could far exceed the liability connected to your policy. A deluxe car insurance plan’s liability usually tops out around $300,000 to $500,000, but most plans have far less coverage. And home insurance experts recommend about $300,000 in liability protection.

Though that may seem like a lot, one bad accident can surpass those limits. That’s where an umbrella policy comes in. Once the liability amount is exhausted from expenses like legal fees and judgments against you, your umbrella policy provides extra coverage – usually starting at $1 million. And if you don’t have umbrella coverage? Expect to pay the difference out of your own pocket.

This article covers how an umbrella policy works (for home and auto insurance), who needs it, and what it costs.

What is an Umbrella Policy?

An umbrella policy covers your assets if you're found liable for property damage or bodily injury. It is an added layer of coverage for if you’re liable for damages or injuries and the liability coverage attached to your home, renters, boat, or auto insurance isn’t enough to cover the amount. It also covers claims that some liability policies may not include like false arrest, libel, slander, and rental units you own.

You’ve been served – now what? If you have an umbrella insurance policy, you’re in luck. Basic home and auto insurance policies include bodily injury (BI) and property damage (PD) liability coverage. If something happens, that liability covers you up to a certain amount. But if the monetary damages come out to more than your liability coverage will pay for, umbrella insurance will cover the rest. 

Let’s cover hypothetical scenarios where an umbrella policy kicks in for both home and car insurance.  

Umbrella Policies for Home

You host a party at your vacation home in Arizona and a guest slips by the pool, injuring themselves. They’re suing you and you’re liable for their medical bills. Your home insurance covers the first $300,000 dollars, but you’ll have to pay the remaining $400,000 out-of-pocket. That is, unless you have umbrella liability insurance.

Depending on the provider, a base homeowners insurance coverage of $250,000 to $300,000 is generally required before you can purchase additional umbrella insurance.

Umbrella Policies for Auto

You blow through a stop sign and hit another car. Fortunately, you’re not injured. Unfortunately, the other driver is sent to the hospital for their injuries. You’re found to be at fault for the accident, and the other driver sues you. You need to dish out money for the car, the driver’s injuries, and lost wages for the time they’re in the hospital. Your auto insurance liability will cover you for the first $150,000, but $50,000 still needs to be paid. Umbrella coverage will pay the remaining cost so you don’t have to.

If you’re looking to add umbrella insurance to your existing auto policy, most providers will require a base insurance coverage of $150,000 to $250,000.

Who Needs Umbrella Insurance?

You may be thinking: do I really need umbrella insurance? People with extensive assets, several properties, or a wealth of savings should seriously consider an umbrella policy. But this level of coverage is useful even if you have an average income and fewer assets. That’s because anyone can get sued, and lawsuits are expensive. Umbrella insurance isn't required, but is often purchased by people who:

  • Have a higher risk of being sued (landlords, coaches, volunteers, and more)
  • Own high-risk items like trampolines, pools, and certain dog breeds
  • Own property
  • Have significant savings and/or other assets

Buying a personal umbrella policy adds an extra layer of security for people who are more likely to be sued. But the argument could be made that everyone could benefit from extra coverage in our litigious society. That’s because even if you don’t have enough in your savings to cover a lawsuit, you can owe what you earn in the future. Without an umbrella policy, you could be stuck paying off a settlement for years.

What Umbrella Insurance Covers

If you’re ever sued, your liability coverage from your home or auto insurance will have you covered up to a point. But after that, you’re responsible for all charges. That is, unless you have umbrella insurance. Umbrella insurance provides coverage for:

  • Slander
  • False arrest, detention, or imprisonment
  • Libel
  • Injuries
  • Property damage
  • Legal defense costs

Although your homeowners and auto insurance may offer coverage for some of these situations, umbrella insurance offers a higher level of coverage and additional support to those policies.

There’s not a lot that an umbrella insurance policy won’t cover – that's one of the great things about it. However, a common exclusion is any damage you may do to your own property. That’s because your homeowners insurance or collision and comprehensive usually takes care of that. Also, umbrella insurance won’t pay for your own injuries, intentional or criminal acts, or damage or injuries you cause while using certain vehicles (like a Jet Ski). If you’re shopping for umbrella policies, ask about any exclusions before you buy.

Umbrella Policy Cost

How much will umbrella insurance cost you? In general, insurance companies offer umbrella insurance in increments of one million dollars. These policies are some of the cheapest for the high level of coverage they buy you. For about $150 to $300 a year, you can buy a $1 million personal umbrella policy. From there, another million will cost an additional $75 per year, and $50 for every additional million. The average American only needs that first million in coverage, as you should get enough to cover all your assets and savings. If you need more than that first million, speak to your insurance provider about the best amount.

This is an estimate of what umbrella insurance will cost you yearly: 

  • One-million-dollar policy: $150 to $300
  • Two-million-dollar policy: $225 to $375
  • Three-million-dollar policy: $275 to $425
  • Four-million-dollar policy: $325 to $475
  • Five-million-dollar policy: $375 to $525

Frequently Asked Questions

Q: What is covered with an umbrella insurance policy?

 A: Umbrella insurance is an extra layer of protection added to your standard home or auto insurance policies. If someone gets hurt on your property or if you hit someone with your car, your liability coverage will pay for a portion of the cost. If that’s not enough, umbrella insurance has your back. You can also use it to cover legal fees if you’re sued, even if you’re cleared of responsibility. Umbrella insurance policies also cover libel, slander, and false arrests.

Q: How much umbrella insurance should I have?

A: When considering your umbrella insurance coverage limits, consider the following:

  • Risks you face
  • The value of your assets
  • The possible loss of future income

You should have enough umbrella insurance to cover all these factors.

If you're a homeowner, your risks may be greater when it comes to the potential disasters that can occur at your home. Or, if you own several properties and have plenty of savings, you have a lot to protect and may want a higher limit. Plus, not only do lawsuits target your current assets, they also risk loss of future earnings. If you consider those aspects and determine you need more than the minimum $1 million, speak to your insurance company. Many people find that amount to be plenty to cover their current assets and future income.

Q: Why is umbrella insurance important?

A: If you’re found liable for a disaster and are sued, there is more at risk than your immediate assets and savings. In some cases, your pension and future earnings can be owed to complete the expenses, even after your savings has been wiped clean. That’s why umbrella insurance is important- so that you don’t have to risk it all in case of a single disaster.

Q: Where do I buy umbrella insurance?

A: Most major insurance companies offer umbrella insurance but do require prior liability coverage through them. That can come in the form of auto, home, or renters insurance. Also, companies have different limits on how much your umbrella policy can cover. Some may cap that number at $5 million, whereas others allow you to reach $10 million. Certain companies will refuse to insure you if you have certain risky hobbies, like Jet Skiing. The best way to determine where you should buy umbrella insurance is by getting a quote to compare insurance companies.

Q: Should landlords have umbrella insurance?

A: If you own a rental property, you are responsible for keeping that property safe for your renters and guests. An umbrella policy will protect you from several scenarios and is a smart investment for landlords. As a landlord, you can be held responsible if:

  • A visitor is injured in a fall because of unkempt property (like a broken handrail)
  • Someone is injured in your workout facilities
  • A third party sues for damages your tenants cause
  • And more

An umbrella policy will protect you if any of these disasters occur on your property and you’re found liable as the property owner.

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