What is Umbrella Insurance?
Umbrella insurance is an added layer of liability protection beyond the protection liability coverage provided by your auto, homeowners, or other policies. Depending on your umbrella policy, it may also cover damages related to libel, slander, and other legal concerns.
Auto or homeowners insurance provides liability coverage up to certain amounts. But if claims exceed these amounts, you may be liable to cover the additional amount out-of-pocket, or from your future earnings. This is where umbrella insurance would provide coverage.
For example, suppose your auto insurance policy provides liability coverage up to $300,000. If you (or your teenage kid) cause a multi-car accident with several people and/or cars, medical bills and property damage could exceed $300,000. Without umbrella insurance coverage, you would be on the hook for these additional expenses out-of-pocket.
Umbrella insurance can be thought of as a "fail-safe" for your insurance protection plan.
What does Umbrella Insurance cover?
Umbrella insurance provides coverage for the following main areas:
1. Bodily Injury
Damages related to injuries (and resulting lawsuits) on your property, automobile accidents, and even dog bites.
2. Property Damage
Car accidents and damage to other people's property.
3. Legal Fees
If someone sues you, even if it's unrelated to a home or auto accident, umbrella insurance will provide coverage. Umbrella insurance coverage includes lawsuits related to slander, libel, or defamation.
4. Rental Property
Umbrella insurance provides coverage to landlords for accidents on their property.
How does it work?
Umbrella insurance policies work in tandem with your other insurance policies and provide benefits once those other insurance coverage limits have been exhausted. Because these policies work together, oftentimes you will need to have one insurance provider for your homeowners, auto, boat, and umbrella insurance policies.
Insurance providers will also require a minimum amount of liability coverage on your other insurance policies before providing umbrella coverage. For example, an insurance provider may require $300,000 of liability coverage on both your auto and homeowners policies before offering you umbrella insurance coverage.
In the event of an accident exceeding your primary liability coverage limits, the umbrella insurance policy will begin paying benefits after your deductible and liability coverage limit has been exceeded.
For example, suppose you are deemed liable for $400,000 of damages due to an accident in your home and you have $300,000 in liability coverage and a $1,000 deductible on your homeowners policy. You would pay your $1,000 deductible, your homeowners policy would cover the next $299,000, and your umbrella coverage would cover the remaining $100,000.
Do I need Umbrella Insurance?
In general, the greater your net worth and/or earnings, the more appropriate umbrella insurance coverage (because you have more at risk). But other factors may also increase your risk and the value of umbrella insurance.
Common risk factors include:
- High net worth or income (or expected high income in the future)
- Teenage driver(s) in your household
- Owning dogs
- A swimming pool or trampoline on your property
- Coaching kids' sports
- Serving on a board or non-profit
- Being a public figure
- Traveling abroad frequently
- Being a landlord
The good news: because the chances of needing umbrella insurance to pay out are relatively unlikely, umbrella insurance tends to be inexpensive.
How much Umbrella Insurance do I need?
If an accident were to exhaust your base policy insurance coverage, your assets or future earnings could be next on the line to satisfy claims. Therefore, a common rule of thumb is to purchase umbrella insurance at least up to your net worth.
However, not all your assets would necessarily be subject to a lawsuit. Certain assets would be protected and could be excluded from your net worth calculation:
- Employer-Sponsored Retirement Plans (401(k)s, 403(b)s, 457s, etc.) have unlimited protection from creditors
- IRAs are protected up to $1,512,350 (it was $1,000,000 in 2005 but has increased with inflation)
- Your home equity may be protected up to certain limits or even entirely, but it varies from state to state
- Annuities and life insurance values may also be protected up to certain amounts depending on your state law
Aside from your assets, your future wages could also be targeted to satisfy a lawsuit. So even if you don't have significant assets today, purchasing some umbrella insurance for coverage beyond your home or auto policy may be appropriate.
How much does Umbrella Insurance cost?
Umbrella insurance is relatively inexpensive and is often offered in increments of $1,000,000. The cost tends to decrease with each additional $1 million of coverage as the likelihood of a claim that large decreases.
Although umbrella insurance is relatively inexpensive, the insurance provider will likely require base levels of liability coverage on your home or auto policies before offering umbrella coverage. So you may need to increase your coverage (and cost) on your other policies.
On the flip side, if you currently have more liability coverage on your home or auto policy than you need for umbrella insurance coverage, you may be able to reduce these coverages and replace that liability coverage with umbrella coverage. For example, if you currently carry $500,000 liability coverage on your auto policy, you may be able to drop that to $300,000, reduce your auto insurance premium, and add umbrella liability coverage.
Is Umbrella Insurance worth it?
As with all your insurance policies, hopefully you will never need to tap into your umbrella insurance benefits. However, in the event of a major liability claim, umbrella insurance could mean the difference between maintaining your lifestyle or having to start over.