What is an Umbrella Policy and Do I Need One?

It’s helpful to think of an umbrella policy as an extra layer of security.  Typically, an umbrella policy is extra liability coverage that can help cover claims that are larger than the coverage limit on your home or auto policy.  It can also cover certain liability claims that your home or auto policies don’t, such as libel, slander, and false imprisonment.  Often, umbrella policies also cover attorney fees and other charges associated with a lawsuit.

Who Needs Umbrella Coverage?

There are several factors that can put you at increased risk, and in these instances, your current coverage may not be enough. For example, if you are responsible for a multiple-car accident and are sued for $700,000 in vehicle damage and medical bills but your auto insurance has a liability limit of $300,000, you will be responsible for the additional $400,000 without an umbrella policy.

Other factors that can put you at higher risk include:

  • Owning a trampoline or pool
  • Owning rental property
  • A long commute or frequently driving during rush hour
  • Coaching kids’ sports
  • Owning a dog
  • Engaging in sports that could injure others (skiing, hunting, etc.)

Even if you are at a lower risk, it doesn’t mean there is no risk. An umbrella policy can offer you that extra peace of mind by providing you coverage beyond your regular policy limits.

How Much Does an Umbrella Policy Cost?

The price varies depending upon the amount of coverage you purchase, the state you live in, and the risk you represent to the insurance carrier. In general, the more cars, homes, or household members your policy covers, the higher your risk and the more you’ll pay for your policy.

Compared to the coverage it provides, an umbrella insurance policy may be an affordable investment. According to the Insurance Information Institute, most $1 million policies cost around $150 to $300 per year. Additional millions in coverage will cost an additional $50 to $75 per year. Bundling an umbrella policy with your auto or home insurance can sometimes be more affordable, so talk to your insurance provider to learn more.

What Should I Consider Before Purchasing Umbrella Insurance?

It’s important to remember that an umbrella policy pays out after all of your underlying coverage is exhausted. This means that most insurers will want you to max out the liability coverage limits on your home and auto policies before they will sell you umbrella insurance. Typically, this equals about $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your homeowners’ policy. While an umbrella policy may be affordable on its own, you’ll need to consider the additional cost of your premium on your auto or home insurance when you max out your liability.

Also, keep in mind that there are certain types of liability umbrella policies won’t cover:

  • Liability sustained in business or professional activities.  To cover these types of incidents, consider business liability insurance
  • Damage you or a member of your household caused intentionally
  • Damage to your property.  Since this is a liability policy, it will only cover you if you’re held responsible for damage to someone else’s property.

While it is unlikely that you’ll find yourself held responsible for a large settlement or a serious accident, accidents can still happen, even when we live with the best of intentions.  Umbrella insurance could be the extra coverage you need to help give you peace of mind and protect you from significant financial loss.