Liability insurance protects your wallet if you are responsible for injuries to another person or their property and it can be a financial lifesaver if someone sues you and wins a large judgment. But if liability coverage isn’t enough financial protection, an umbrella policy extends your liability coverage.
“Think about umbrella coverage as a safety net or extra liability insurance that starts paying losses after you’ve reached the limits of your basic policy,” says Carole Walker, executive director of the Rocky Mountain Insurance Association.
Does an umbrella policy make sense for you? Before deciding, it’s crucial to learn more about these policies.
- Umbrella policies provide extra liability coverage which kicks in once you have exceeded the liability coverage in your homeowners, renters or auto policy.
- Umbrella policies are most often recommended to people with substantial assets to protect.
- An umbrella policy does not offer any protection for your home, auto or possessions; it is strictly liability insurance which helps cover costs related to damage you are responsible for causing.
Is an umbrella policy a waste of money?
It depends. For people of modest means, a personal umbrella insurance policy might not make sense. If you don’t own a home or have any savings or investments you may not need the extra financial protection that an umbrella policy offers.
However, if you have significant assets to protect, an umbrella policy can offer a relatively low-cost way to add $1 million, $2 million or more in additional liability protection.
“In our litigious society, you don’t need to be a millionaire to require an extra million dollars in liability coverage,” Walker says.
Hopefully, you will never need to use your umbrella coverage, but if you are sued and have a massive judgment lodged against you, an umbrella policy can potentially keep you from losing thousands or even millions of dollars.
What is the purpose of an umbrella insurance policy?
A standard homeowners or auto policy offers liability coverage, but the amount is usually limited to just a few hundred thousand dollars. For example, a typical homeowners policy offers a minimum of $100,000 in liability coverage, with policyholders having the option to increase their coverage to as much as $500,000.
However, that might not be enough coverage for people who have substantial assets, such as a high-end home, multiple cars, a boat or RV, as well as numerous investments. For these folks, the excess liability insurance that an umbrella policy offers often makes sense.
An umbrella policy provides additional liability coverage once you exhaust the limits of the liability coverage on your homeowners, renters or auto insurance coverage.
The extra protection that a personal umbrella insurance policy offers can be a financial lifesaver. If you cause an auto accident and are responsible for serious injuries — or even a death — you could be sued for hundreds of thousands of dollars or more.
An umbrella policy might provide the extra financial protection you need in such circumstances.
“You need to consider what could be at stake if you had a claim or lawsuit filed against you,” Walker says.
Who needs umbrella insurance and why?
Umbrella insurance makes the most sense for the following types of people:
- Those with a high net worth may need several million dollars in additional liability coverage.
- Those who want more than $500,000 in liability coverage, which is the limit on a standard homeowners policy.
- Drivers who spend a lot of time behind the wheel are more likely to have an accident and make a claim on their auto insurance.
- Parents with teen drivers in their household — teens are risky drivers.
- Homeowners who have dogs, swimming pools, trampolines, etc., which increases liability risk.
Tool: Our umbrella insurance calculator determines whether you need umbrella coverage
What is covered by an umbrella policy?
An umbrella policy is a form of liability coverage. It pays out to cover damages that you have caused to another person or their property. This includes medical bills, legal costs and property damage up to your coverage limits.
A personal umbrella policy kicks in once you have exhausted the liability limits on your homeowners, renters or auto policy. In order to purchase an umbrella policy you must be carrying the minimum amount of liability insurance through your homeowners and auto policies.
What is not covered by an umbrella policy?
An umbrella policy does not provide additional coverage to reimburse you for damages to your home, auto or possessions.
In addition, personal umbrella coverage does not protect any business activity. So, if you own a small business, you will need a separate policy if you want umbrella coverage for the business.
What are the benefits of an umbrella insurance policy?
An umbrella policy has several benefits. This type of policy:
- Offers liability protection far beyond what you can obtain with most homeowners, renters insurance or auto policies.
- Helps pay for judgments if you are responsible for damaging another person or their property.
- Is available at a relatively affordable cost. For example, in most cases, you can get $1 million in coverage for just $20 monthly.
“You will pay less if your chances of being sued are fairly slim,” Walker says.
For example, she says your premiums are likely lower if you own only one home or are a low-risk driver.
“On the other hand, if you own a house, a lake cabin, along with a boat and a snowmobile, you’ll pay for having considerably more exposure to risk,” Walker says.
What are the disadvantages of umbrella insurance?
An umbrella policy is not suitable for every person or every situation. This type of policy:
- Might not make sense for someone with little to no assets to protect.
- Does not offer coverage for your small business or side hustle.
- Does not protect your own home, car or possessions.
In addition, you will have to purchase more liability insurance on your homeowners or auto policy before qualifying for umbrella coverage.
“Many insurance companies won’t sell you an umbrella policy unless you already carry a certain amount of basic liability coverage,” Walker says.
She says the amount is generally $300,000 of underlying coverage on your homeowners insurance policy and $250,000 of underlying coverage on your auto insurance policy.
“Many companies also require that you insure both your home and car with them before they’ll sell you an umbrella (policy),” Walker says.
Final thoughts: Umbrella insurance policies
An umbrella insurance policy doesn’t make sense for everyone, but it can be an absolute lifesaver in certain situations, especially for policyholders with substantial assets to protect. Umbrella insurance coverage offers affordable liability protection that could keep the policyholder from financial ruin in the wake of a lawsuit.
Learn about the top-rated umbrella insurance companies
Resources & Methodology
Sources
- Insurance Information Institute. “How much homeowners insurance do I need?” Accessed August 2024.
- Insurance Information Institute. “Umbrella liability policy.” Accessed August 2024.
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