Imagine that you’re just a few years away from a well-deserved retirement. You’ve got a sizable retirement account plus a fully paid off house and car. Altogether, your assets amount to a little over $1 million. In short, life is pretty good.
Then, you get into a car crash, causing serious damage to a vehicle full of highly paid executives. A court rules that you’re responsible for the accident and must pay for the other vehicle’s damage, the executives’ medical bills, and their lost wages. All told, you owe more than $1 million in damages. And your car insurance only covers a fraction of it.
This disaster could ruin you — unless you have an umbrella insurance policy. This kind of insurance takes over when your other policies run up against their coverage limits. In a case like this, it could save you from losing all your hard-earned savings to one unfortunate accident.
What Is Umbrella Insurance?
Most insurance types protect just one part of your life. For instance, your auto insurance policy protects you in case of a car accident. Your homeowners policy covers your house, and the belongings in it, against theft or damage.
By contrast, umbrella insurance is a single policy that covers your whole life the way an umbrella covers every part of your body in a rainstorm. When you run over the liability limits on one of your other policies, your umbrella policy takes care of the extra costs.
Umbrella insurance is a type of liability insurance, meaning its job is to protect you against lawsuits. Damages in a lawsuit can easily add up to millions of dollars — far more than the liability protection on most homeowners or auto insurance policies. Having an umbrella policy keeps a massive lawsuit from wiping out all your other assets.
Additionally, an umbrella policy protects you against being sued for damages other policies don’t cover. For instance, it can protect you from lawsuits over an accident you cause while on vacation in another country. Some policies also protect you from claims like defamation, property owner liability, false arrest, or invasion of privacy.
What Does Umbrella Insurance Cover?
Umbrella insurance is multifaceted coverage that can protect your assets from many common legal issues. However, it doesn’t cover everything.
What Umbrella Insurance Does Cover
An umbrella insurance policy protects you from costs for:
- Bodily Injury. If you injure someone in a car accident and the medical bills exceed the limits of your auto insurance, an umbrella policy picks up the tab. Similarly, if the electrician slips and falls down the stairs while leaving your house, the umbrella policy covers any medical bills beyond the limits of your homeowners policy.
- Property Damage. If your teenager crashes the family car through a fence and into your neighbor’s house, an umbrella insurance policy can pay for any damage beyond the limits of your auto insurance.
- Incidents Not Covered by Insurance. If your dog bites someone while you’re out on a walk, homeowners insurance doesn’t cover the damage, but umbrella insurance does. Likewise, if you accidentally crash a rented boat into a pier, it can take care of the cost. It even covers accidents that occur while traveling outside the country.
- Property Owner Liability. If you have a rental property, umbrella insurance can cover claims for damage suffered by a tenant. It also protects you against claims for wrongful entry or eviction.
- Legal Damages. An umbrella insurance policy protects you if someone sues you for defamation — words that cause injury to them. It can also protect you against claims for civil violations like false arrest, malicious prosecution, and violation of privacy.
- Legal Fees. Finally, umbrella insurance covers legal fees and court costs in a lawsuit. With an umbrella policy, you know you can afford a good lawyer to protect your assets.
What Umbrella Insurance Does Not Cover
Although umbrella insurance protects you against most types of lawsuits, there are certain kinds that many policies specifically exclude. For example, many umbrella policies have exclusions for:
- Damage Caused by a Business or Business-Related Activity. One example is malpractice claims for a doctor. For those, you need a separate malpractice policy.
- Liability Under a Contract. If you violate a contract you signed, an umbrella policy doesn’t cover it. For instance, it doesn’t protect you if a contractor sues you for failure to pay for work you hired them to do.
- Deliberate Damage. Damage you cause deliberately to any person or property is also outside an umbrella policy’s protections. For example, if you punch a co-worker in the face and they sue you, you’re on the hook for any damages.
- Damage Caused by Restricted Dog Breeds. Some umbrella policies exclude damage caused by certain breeds of dogs considered dangerous, such as pit bulls. However, you can buy a separate pet liability policy to cover that kind of damage.
Also, umbrella insurance only pays for damage to other people. It doesn’t cover any damage to your person or personal property. If you get hurt in an accident at home, only your health insurance can pay for your care. Anything it doesn’t cover comes out of your pocket.
Similarly, if a burst pipe causes damage to your home, only your homeowners insurance can cover that loss. If the damage exceeds your policy limit, you must pay for it yourself. However, if the water damages a neighbor’s property and they sue you for damages, umbrella insurance covers that cost.
How Does Umbrella Insurance Work?
Think about the hypothetical case involving a car accident with executives. Suppose that when it happens, you have an auto insurance policy with liability limits of $100,000 per person and $300,000 per accident for bodily injury. It also covers up to $100,000 in property damage.
Unfortunately, the damage from this accident is much greater than those limits. The executives’ medical bills come to $250,000, and their lost earnings amount to $750,000. And their $100,000 luxury car is totaled. The total damage is $1.1 million.
Your auto insurance covers the $100,000 damage to the car and the first $300,000 for the injuries. That leaves you on the hook for the remaining $700,000.
At this point, your personal umbrella policy kicks in. It covers all the rest of your damages and even covers your legal bills from the lawsuit. Thanks to your umbrella coverage, your home and retirement savings are safe.
Do You Need Umbrella Insurance?
There are two good reasons to buy umbrella insurance. The first is if you have a lot of assets and not enough liability coverage to protect them in a lawsuit.
For instance, if your net worth is $1 million and your auto insurance only covers you for $300,000 per accident, an umbrella insurance policy protects the rest of your assets. But if your net worth is only $100,000, you’re less likely to need umbrella insurance.
The other reason is if you’re at a higher-than-average risk of being sued. For example, if you spend a lot of time on the road, you’re at more risk of an auto accident that could lead to a lawsuit. Or if you often host parties, there’s more risk of a guest injuring themselves in your home.
Other factors that can put you at risk for a lawsuit include:
- Having a teenager or other inexperienced driver in your household
- Having a swimming pool, a dog, a gun, a treehouse, or a trampoline on your property
- Being a rental property owner
- Coaching kids’ sports
- Engaging in sports with a high risk of injury, such as hunting, surfing, or skiing
- Being a well-known public figure
Umbrella Insurance FAQs
Most people are familiar with common types of insurance like health, auto, and home insurance. However, umbrella insurance is less well-known. If you’re learning about it for the first time, it’s natural to have questions.
How Much Does Umbrella Insurance Cost?
Umbrella insurance policies generally come in units of $1 million in coverage. The smallest possible policy is $1 million, the next increment is $2 million, and coverage continues to climb in $1 million increments from there.
For a household with one home and two cars, a typical cost for a $1 million personal umbrella policy is between $150 and $400 per year. A $2 million policy costs $225 to $500. Each additional million in coverage adds between $40 and $80 to the cost.
How Do I Buy Umbrella Insurance?
To buy umbrella insurance, you must already have auto or home insurance or both — and a lot of it. Most insurers won’t sell you an umbrella policy unless you carry the maximum liability coverage on your car insurance and property insurance — about $300,000 each.
Nearly all major insurance companies offer umbrella insurance. However, most only issue policies to existing customers who have auto or home insurance with them. So the best way to compare quotes on umbrella policies is to shop around for auto and home insurance at the same time.
Ask your current insurers how much they would charge to add umbrella coverage to your policy. Then ask other insurance companies how much they’d charge to switch your coverage to them and add an umbrella policy too.
How Much Umbrella Insurance Do I Need?
To figure out how much umbrella coverage you need, first calculate your net worth. Add up the value of all your assets: your house, cash in the bank, stocks and bonds, retirement accounts, and anything else of financial value. Then subtract the value of your debts.
Next, find your current liability coverage. On your auto insurance policy, there are three separate numbers to look at: bodily damage per person, bodily damage per accident, and property damage per accident. On your home insurance policy, there’s just one: personal liability per occurrence.
The difference between your net worth and current coverage is the amount you have that’s unprotected. Getting a personal umbrella policy for at least that amount gives you full protection.
Do I Need Umbrella Insurance if I’m a Renter?
Umbrella insurance isn’t just for homeowners. You can be a renter and still have substantial assets to safeguard. And while renters insurance protects your property, it doesn’t always protect you from liability.
Suppose your space heater starts a fire that causes damage to multiple apartments. Your renters insurance will pay for the damage to your belongings. However, if it doesn’t include liability coverage, it won’t pay for a suit over damage to other units.
And even if your policy does have this coverage, the policy limit may not be enough to cover all the damage. In a situation like this, umbrella insurance can protect you from a costly lawsuit.
Does a Personal Umbrella Insurance Policy Cover My Family?
If they’re part of your household, it does. In fact, one of the most significant benefits of umbrella insurance is that it protects parents who get sued for damages resulting from an auto accident caused by a teenage child.
But umbrella insurance also protects you from other types of damage involving family members. For instance, it protects you in a libel lawsuit over a post your tween made on social media. And it often protects you from lawsuits over damage caused by pets, such as a dog bite.
Is Umbrella Insurance the Same as Excess Liability Insurance?
They’re similar but not identical. Excess liability protection raises the liability limits on your current insurance policy, but it doesn’t provide the additional protections of an umbrella policy. For example, it doesn’t protect you in a libel lawsuit or cover legal bills.
Like an umbrella on a sunny day, a personal umbrella insurance policy is something you don’t expect to use. But also like an umbrella, it’s much better to have it and not need it than to need it and not have it.
For just a few hundred dollars per year, you can be sure an unexpected lawsuit won’t wipe out your retirement savings or your kid’s college fund. The peace of mind that knowledge brings makes it well worth the cost.