Umbrella Insurance: How it Works (2023)

You worked hard to build your wealth. If you want to preserve it, even in the event of a catastrophe you’re financially responsible for, umbrella insurance should be on your radar. Put simply, umbrella insurance offers coverage for lawsuits and liability claims that your homeowners policy or car insurance plan won’t cover.

While auto insurance won’t pay for major disasters, most states require it for drivers. To find the best auto insurance policy for your unique situation, check out this car insurance comparison tool. There are no fees or sign-ups, and you can receive access to personalized auto insurance quotes in minutes.

What is umbrella insurance?

Also known as personal liability insurance, umbrella insurance is essentially a safety net for your savings and assets. It offers excess liability insurance or additional coverage beyond the liability protection in your homeowners insurance, car insurance, boat insurance, and any other policies you might have.

Umbrella insurance is designed to protect you in unexpected, expensive situations where repairs or medical bills exceed your other coverage. It usually starts at $1 million and can go as high as $10 million for those who are eligible. Although it’s common for people who purchase umbrella insurance to choose the standard $1 million amount, many invest in more coverage.

Keep in mind that umbrella insurance is similar to excess liability insurance, which offers higher liability coverage limits. However, there is one key difference. Umbrella insurance usually provides extra protection that you won’t find in your base insurance policies, like paying out for legal fees and damages.

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How Umbrella Insurance Works

Let’s say you rear-ended another car. The accident caused serious vehicle damage and injuries to the drivers and passengers involved. The car needs $30,000 in repairs, and it costs $200,000 to cover all the medical bills that came from this incident.

Also, the driver of the other car is a landscaper who can’t work for a few months because of his broken foot, so he sues you for the $300,000 he’d lose in revenue. You’re suddenly responsible for $530,000. If the liability coverage with your car insurance policy is only for $300,000, you’ll need to come up with the remaining $230,000 out of pocket.

If you had umbrella insurance, it would cover the difference between what your auto insurance covers and what you still owe, as well as any legal fees.

What Umbrella Insurance Covers

Umbrella insurance applies to more situations than a typical auto or home insurance policy. It protects you from financial responsibility if you cause damage to another person or their personal property. You can expect a personal umbrella policy to kick in after you run a red light and cause a car accident or after someone falls into your pool and injures themselves.

It may also come into play if your dog bites a neighbor or you’re on vacation with your family and accidentally hurt another traveler while on a watercraft. In addition, umbrella insurance may come in handy if you’re being sued for libel, defamation, or slander.

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What Umbrella Insurance Doesn’t Cover

Just like other insurance policies, umbrella insurance doesn’t cover everything. If you injure yourself or your own property, it won’t go into effect. You’ll need to pay for your damages on your own. Also, if you intentionally hurt someone or damage their property on purpose, umbrella insurance won’t save the day.

Contrary to popular belief, personal umbrella coverage won’t cover flood damage, either. If you live in an area that’s susceptible to flooding, you’ll need to buy flood insurance. However, if you accidentally leave your kitchen faucet on, flood your condo, and get sued by your neighbors, it will apply.

In addition, if you own your own business, umbrella insurance will not protect you, as it is not a form of commercial insurance. Lastly, umbrella insurance is not designed to pay for contracted worker injuries or expenses related to war, terrorism, or nuclear radiation.

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Pros of Umbrella Insurance

The greatest benefit of umbrella insurance is that it offers extra liability coverage and pays for legal fees once the liability limits of your other policies (home insurance, auto insurance, boat insurance, motorcycle insurance, etc.) have been used up. It also covers incidents that your other policies may not, such as libel and slander.

When you consider that a $1 million umbrella insurance policy is only a few hundred dollars per year, it’s clear that it’s low in cost for the significant amount of coverage it provides. Also, umbrella insurance coverage often applies anywhere in the world, so it can protect you while you’re traveling for work or pleasure.

Cons of Umbrella Insurance

In order for umbrella coverage to kick in, you must carry a minimum amount of other coverage, such as auto insurance and homeowners insurance. If you’re a business owner, it won’t help you with business-related incidents. Also, you may never have the need for umbrella insurance, especially if you don’t live a risky lifestyle.

Do I need umbrella insurance?

Since umbrella insurance is optional, you may wonder whether you need it. You might want to consider it if you:

Own property: If you own one or multiple properties, umbrella insurance can save you from out-of-pocket costs for any injuries that occur there. This type of policy is particularly important if your property features a swimming pool, trampoline, treehouse, or other features that can open the door to dangerous incidents.

Have a dangerous pet: Umbrella coverage may benefit you if you own a potentially dangerous pet, like a German shepherd or pit bull terrier. Your homeowners insurance probably won’t cover dog bites from these breeds.

Are wealthy: If you’ve worked hard to accumulate major savings and assets, umbrella insurance can protect your wealth. Unfortunately, one lawsuit may be enough to wipe out everything you have.

Travel internationally: People have the right to sue you for accidents you cause while you’re abroad. Since it usually applies everywhere, umbrella insurance can give you some peace of mind during your trips to different countries.

Participate in risky sports or hobbies: If you frequently participate in risky activities like skiing, car racing, hunting, or others that may lead to unintentional harm, an umbrella insurance policy is a good idea.

Umbrella Insurance Cost

Research from the Insurance Information Institute shows that the cost of umbrella insurance with $1 million in coverage ranges from $150 to $300 per year, making it an affordable investment. When you get an umbrella insurance quote, your insurance company will consider these factors.

• Your age

• Your location

• Your credit history

• Your driving record

• Your net worth

• Your risk of filing an umbrella insurance claim

How much umbrella insurance do you need?

Most insurance companies offer umbrella insurance in million-dollar increments. You can purchase $1 million in coverage or up to $10 million if you qualify. The right amount of umbrella coverage depends on your unique situation.

Ideally, however, you’d have enough to cover your net worth. It’s a good idea to add up the value of all your assets, including your properties, savings, and investment accounts. Then, subtract the liability insurance you already have through other policies. If possible, buy enough umbrella insurance to make up the difference.

Buying Umbrella Insurance

While most major insurance companies sell umbrella insurance, they usually require that you also purchase your homeowners, condo, renters, and auto insurance through them. In general, you’ll need to buy a minimum amount of liability insurance on these other plans before you’re eligible for an umbrella policy.

If you’re looking for stand-alone umbrella insurance, consider RLI and Auto-Owners Insurance. These are two companies that might offer you an umbrella policy, even if you’ve purchased your other insurance plans from another insurance agency.

Protect Your Wealth with Umbrella Insurance

In a perfect world, you’d never need personal umbrella insurance. However, unexpected incidents sometimes happen and have the potential to destroy your finances. With umbrella insurance, you can protect your wealth and gain some much-needed peace of mind.

If you’re interested in umbrella insurance, use this car insurance quote comparison tool to help you find an auto insurance company that offers it. You’ll get free personalized car insurance quotes in minutes without having to sign up.

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