What is an Umbrella Insurance and Do You Need One?

In an increasingly litigious society, it can be scary to think what might happen if you are responsible for an accident, and then are sued. It’s true that your insurance policy probably has liability coverage, but are the limits high enough? Adding more liability coverage to a homeowners policy or an auto policy can cost quite a bit of money, and result in thousands of extra dollars over the life of your policy. Then, if the liability limit still isn’t sufficient, a lawsuit could result in someone coming after your assets.

Photo by princedd via Flickr

If you are concerned about your level of liability coverage, and want a way to increase your coverage, consider umbrella insurance.

What is a Liability Coverage?

First, it helps to understand liability coverage. Liability basically means what you are responsible for. So, if someone gets hurt through your negligence, or through some other action of yours, you are responsible for paying the costs. On an auto policy, your liability insurance will cover the cost of damage to the other person’s car if you are at fault, as well as cover medical costs related to injuries the other driver may have sustained due to your driving.

Homeowners liability coverage is meant to help cover the costs related to someone becoming injured on your property. So, if you fail to keep your walk free of ice, and someone slips and breaks a hip, you might be held responsible for covering the cost of the hospital stay.

In many cases, the costs of taking on such responsibilities are larger than most people could pay out of their pockets. Liability coverage can help pay those costs. Liability coverage also usually pays legal fees and judgments — up to the limit specified by your policy — if there is a lawsuit. That way, your personal assets are protected if a civil case goes against you.

What is an Umbrella Insurance?

Umbrella insurance acts as a policy that increases your liability coverage. Umbrella covers a multitude of liability shortfalls (which is why it’s referred to as an “umbrella” policy). One umbrella insurance policy will provide you protection as a homeowner, auto owner and watercraft owner. Other types of liability might also be included in umbrella coverage.

Many umbrella policies provide an additional $1 million to $5 million in liability coverage. It’s even possible to get additional coverage of up to $10 million or more, depending your level of risk. This means that, after the liability limits have been reached, there is extra coverage. It is important to remember that umbrella coverage doesn’t “kick in” until after the limits on your primary policy has been reached. The point of umbrella insurance is to provide you with extra protection.

Understand that umbrella coverage probably won’t cover business-related activities. If you have a home business, you might need separate insurance. You can speak with your insurance agent to find out about some of your options. In some cases, you can add a home business endorsement to your homeowners policy, or even to your umbrella policy. But you shouldn’t assume that claims related to your home business activities are automatically covered.

How Much Does an Umbrella Insurance Cost?

As with all insurance, umbrella insurance premiums are based on how much coverage you get, and how much of a risk you represent. An average policy might cost an extra $150 per year, plus an extra $50 each year for each additional $1 million in coverage. However, these numbers vary depending on various factors. There is no one set price.

Normally, umbrella coverage premiums are added to your current policy premiums. Some companies won’t let you add umbrella coverage unless you have both auto and homeowners policies with them. This can actually be an advantage. If you have multiple policies with one company, you might be eligible for a discount. Find out what incentives there are for consolidating coverage with one company.

Additionally, you can raise your deductibles on your homeowners and auto policies in order to help afford the cost of the umbrella coverage. Just make sure you have an emergency fund that is sufficient for handling the increased out of pocket expenses, should it become necessary.

Do You Need an Umbrella Coverage?

Not everyone needs umbrella coverage. You will need to evaluate your position to determine whether or not umbrella coverage makes sense for you. There are two main considerations as you determine your need for umbrella coverage:

  1. What risk do you represent?: Consider your risks. Do you have a pool in your backyard? Do you have a dog? Do you have teen drivers? Do you have a long commute? All of these items represent risks to others. These are situations that could also result in a lawsuit, and if you’re found negligent, you could end up being responsible for a rather large sum of money. The greater the risk you represent, the greater the likelihood that you need umbrella insurance.
  2. Do you have a large number of assets?: If you live in a rental, and have few assets, there isn’t much that someone can go after you for, should he or she decide to sue. However, if you have a large number of assets, including savings, retirement, multiple homes, and cars, you might want to protect them. A lawsuit can result in your assets being diminished. If you are concerned about your assets, an umbrella policy can help. Even someone with relatively modest assets might consider an umbrella policy.

Take a few minutes to figure out whether or not umbrella coverage makes sense for you. If you are concerned that your dog might bite the neighbor kid, or if you are worried that your teenager will put someone in the hospital in a moment of inattentive driving, a little extra coverage might not hurt — especially if you are concerned that your accounts could be depleted by one lawsuit.

Umbrella coverage isn’t for everyone, but for many it provides peace of mind at a fairly reasonable price.

Do you have an umbrella policy? If yes, why did you decided to get one?

Get your life insurance quotes now, or you can also check out these list of insurance companies that can provide you with free quotes:

About the Author

By , on Feb 21, 2012
Miranda Marquit
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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Leave Your Comment (5 Comments)

  1. Great post! My understanding is that umbrella insurance kicks in once you’ve reached the limits of the liability amounts of your home and car insurance. Doesn’t cost much to get coverage for $1million and buy your peace of mind.

  2. Leigh says:

    Definitely. My assets may still be slowly growing since I’m in my twenties (currently around $150,000), but my income is around that level and growing as well. I don’t want to risk being sued for all of my future earnings.

  3. Being a 1 percenter, I have about 2 million in assets, including 2 rental properties. We also have a pool. Too many risks and the benefit of the peace of mind outweights the cost of the insurance policy.

  4. Joe says:

    Have a problem with excessive litigation? I’m looking at you, America!

    “Loser pays.”

    Problem solved. You’re welcome guys.

    — your slightly smug Canadian neighbour

  5. Einstein says:

    The old umbrella policy really has a basic test – “are you rich?” If so, umbrella up! If not, you don’t need to prepare for a legal rainfall that won’t get you wet with legal troubles, fees, and possible asset losses.

    One thing to remember – if you get a policy, don’t tell anyone. An umbrella insurance policy is a target in and of itself.

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