What is an umbrella policy and who needs it?
If you have assets and savings you want to protect beyond the maximum liability coverage you're able to purchase via your home or vehicle insurance, umbrella insurance can protect your assets up to $5 million or more, depending on the insurer. For example, since most homeowners insurers don't offer liability coverage beyond $500,000, you may need umbrella insurance to protect your assets from personal liability claims if your net worth exceeds $500,000. Otherwise, your assets will only be protected up the amount on your existing policy, and a costly accident could result in you losing what you've worked hard for.
Nobody's perfect. That's why you buy liability insurance: You can avoid financial ruin if you accidentally cause major injuries or property damage to others. Problem is, your insurance isn't perfect, either. That's where a personal umbrella insurance policy comes in.
How does umbrella insurance work?
Umbrella insurance provides extra liability coverage beyond the limits on your existing auto, homeowners or other policies. It pays out if you're at fault for injuries or damage and your other policies aren't sufficient to cover the costs.
Umbrella insurance works as a secondary layer of liability protection in addition to your personal liability coverage and other vehicle liability insurance coverage. It helps protect your assets from liability claims made against you that exceed your liability limits. Consider these five examples of how umbrella insurance could work to protect your assets:
Vehicle accident: You're found liable for an accident that resulted in personal property damage and/or bodily injury costs that exceed your standard policy's limits. Umbrella insurance can cover the excess liability costs up to your umbrella policy's limit.
Imagine this scenario:
You run a red light and T-bone another car. There is significant damage to the vehicle, and several people are injured. The car needs $25,000 in repairs, and treatment of the injuries totals $275,000. Plus, the driver of the other car is an orthodontist who won't be able to work for months due to a broken arm. He sues you for $200,000 in lost earnings.
You're on the hook for a total of $500,000. If you carry only $300,000 liability coverage with your car insurance, the remaining $200,000 will have to come out of your pocket.
If you had umbrella insurance, it would pay the difference between what your primary insurance covers and what you still owe. An umbrella policy would also cover your legal costs in the lawsuit.
Injury on your property: Someone is injured while on your property or on a property you've rented out. The injury costs you're liable for exceed your personal liability limit, and your umbrella insurance can cover those liability costs up to your umbrella policy's limit.
Dog bite: Homeowners insurance coverage for dog bites differs by insurer, but if your dog bites someone, resulting in medical or legal costs that exceed your personal liability coverage, umbrella insurance can offer coverage.
Lawsuit: A person or business brings a personal injury lawsuit against you and you're found liable for bodily injury, slander, libel, or defamation. Depending on your insurer and policy, umbrella insurance may provide coverage for what you owe and the associated legal costs, if they exceed your other applicable insurance policy's limits.
Do I need an umbrella policy?
To determine if you need an umbrella policy, calculate your net worth (add up your assets and savings, and subtract any debts), and find out your current liability limits. If your net worth exceeds your liability limits, ask your insurer if you can increase your coverage. If the maximum liability coverage you can get via your vehicle and homeowners policies is still less than your net worth, you'd need umbrella insurance to cover all of your assets. Note that while umbrella insurance can provide helpful coverage, it's not required by law.
How much does umbrella insurance cost?
Umbrella insurance can be affordable, especially considering the small premium you pay for the broad protection you receive. Typically, an umbrella policy costs around a few hundred dollars per year for $1 million of coverage, depending on the insurer.