Umbrella Insurance: How it Works and Coverage
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Umbrella insurance is personal liability coverage that only pays out if your home or auto insurance has hit its limits. These policies pay when a claim exceeds the liability coverage on existing homeowners or auto insurance policies. Most umbrella insurance policies are affordable with coverage limits starting at $1 million.
Umbrella insurance differs from excess liability coverage. Umbrella insurance adds coverage to limits on both your homeowners and auto insurance policies simultaneously, whereas excess liability can only be purchased for one insurance policy at a time.
Below is a comprehensive look at what umbrella insurance is, how it works, if it's worth the cost, and the amount of coverage you need.
How Does an Umbrella Policy Work?
Umbrella insurance kicks in when you've reached your base liability limits on a primary policy.
If you don't have personal liability umbrella insurance, you'll have to pay any expenses that exceed your homeowners or auto insurance policy yourself. The courts could seize assets, such as your life savings, stocks and bonds, to compensate the victim or garnish your wages.
Here are some examples of how umbrella insurance works:
Your son punches another boy in the face, causing him to fall and hit his head. The boy suffers a traumatic brain injury, and his parents sue you for the medical expenses and rehabilitation costs. You exceed your homeowners insurance personal liability limits and umbrella coverage pays the remainder.
You are found liable for a multi-car accident on a highway, and your coverage isn't enough to cover everyone's medical expenses. Umbrella coverage kicks in to pay what was not covered.
You prepare a chicken salad for a picnic, and multiple people get salmonella poisoning, and one person dies. The victims sue you for medical expenses and damages, and your homeowners insurance limits are not enough, so umbrella insurance pays the remainder.
Your pitbull escapes from its enclosure and mauls a child who requires reconstructive surgery. The parents sue you for medical expenses and the child's pain and suffering. Your homeowners insurance won't cover all the bills, but umbrella insurance can cover up to an additional limit, which is $1 million or more.
What Does Umbrella Insurance Cover?
Umbrella insurance provides coverage against lawsuits when you're liable for:
Personal injuries to other people
Damages to other people's property
Defamation, slander and libel
Umbrella policies may also cover the following damages:
Defense costs and legal fees
Shock and mental anguish
Injuries caused by dangerous dog breeds (unless excluded by the underlying policy)
Liability for incidents overseas
Accidents at rental properties
Umbrella policies may also extend protection to your household members, such as a spouse, relatives and dependents.
What Doesn't Umbrella Insurance Cover?
Umbrella insurance doesn't cover your injuries or your property damages. Other policies handle these issues, including your health insurance and comprehensive or collision insurance.
Here is a list of what liability insurance doesn't cover:
Your bodily injuries
Your property damages
Liability or damages caused by war and armed conflicts
Intentional and criminal acts committed by you or a household member
Liability that you assumed under another contractual agreement
Claims excluded from coverage in an underlying policy (for example, restricted dog breeds in a home insurance policy)
Property damages or personal injuries caused by your business
Liability from business transactions
Policy exclusions in your umbrella policy
Who Is Covered by Umbrella Insurance?
Those typically covered by an umbrella insurance policy are:
You and your spouse
Relatives who live in your home
Any dependants who live under your roof, such as your children
Those who drive any vehicle that is covered under your umbrella policy, belongs to you, and is insured by your auto insurance
There are exceptions, like if your daughter has a renters policy on an apartment he's living in while attending college. Relatives who live with you but have their own auto insurance policy may not be covered either. Umbrella insurance only extends to your own homeowners and auto insurance policies unless they are a dependent.
Do I Need Umbrella Insurance?
Most states don't require people to purchase umbrella insurance, but umbrella insurance policies may help individuals with significant assets or higher liability risks. You should consider this personal liability coverage under the following circumstances:
1. You are a high-income earner
You may need an umbrella policy if you're a person with a high income whose net worth exceeds your auto, home or watercraft insurance coverage limits.
Umbrella insurance protects individuals with significant assets such as investments, a home (or several homes), substantial life savings and rental properties. If someone sues you and wins, you could lose everything.
For instance, a visitor slips, falls and breaks a hip on an icy sidewalk on your property. The accident causes them to suffer a permanent disability. The person sues you, and a court finds you liable, and you must pay the victim's medical expenses and pain and suffering. After maxing out your homeowners insurance policy, you may have to sell your home to pay off the judgment.
An umbrella insurance policy offers peace of mind by providing at least $1 million in coverage at an affordable premium.
2. You have a higher liability risk
Another reason you may need umbrella insurance coverage is if your liability risk is higher than others. Several situations may raise a person's liability risk:
You own a dangerous dog breed, such as pit bulls, wolf hybrids and Rottweilers.
You coach intramural or kids sports
You are a parent or guardian of a minor that drives
You are a gun owner
You host many parties
You have a swimming pool, trampoline or treehouse
You participate in high-risk sports, such as skiing, surfing or hunting
Suppose your pet Rottweiler lunges past you while you're getting the morning paper and attacks a jogger. The person falls, breaks their leg and suffers permanent nerve damage. The victim is a professional dancer and can't earn a living because she can no longer dance.
If you're sued, your homeowner insurance will cover some of the settlement, but you may be responsible for her medical costs and future lost income that well exceed your home insurance policy's coverage limits. Umbrella insurance would cover the excess damages, up to limits.
Is Umbrella Insurance Worth It?
Umbrella insurance is worth the price if you have significant assets, and your liability insurance doesn't have enough limits to protect them.
Some advantages of liability insurance include:
Extra liability coverage when you exceed your automobile, home and watercraft policies
Limits start at $1 million and higher
Covers incidents your primary insurance may not cover, such as libel and slander
Coverage applies anywhere in the world
For instance, what if you were at-fault in a car crash that caused another driver and two passengers significant injuries? If you're found liable, umbrella insurance could protect your assets, whereas your auto insurance liability limits would probably not suffice.
When Should You Consider an Umbrella Policy?
The basic rule of thumb is the more assets you have, the likelier the possibility you need umbrella insurance. You probably need umbrella insurance if you're making a six-figure income and have equity in a home or two. It isn't a bad idea to have umbrella insurance if your net worth is higher than $500,000.
You also may need to consider umbrella insurance if there are higher risks associated with your property and lifestyle. Umbrella insurance makes sense if you own a more aggressive breed of dog or a gun. Do you have things like pools and trampolines? Imagine someone's child is hurt on your property while playing with one of these toys. Umbrella insurance could be what saves you from financial ruin. Remember, umbrella insurance also offers extra coverage for defamation, slander, and libel.
What Are the Requirements for Umbrella Insurance?
Every insurance company will have requirements you must meet before you get umbrella insurance. You will need homeowner's insurance, auto insurance, and boat insurance if you own a boat. You will also have minimum coverage limits for each policy. An example might be you are required to have a homeowners policy with a $300,000 limit per person and a $300,000 limit per occurrence for bodily injury along with a $100,000 limit for property damage. And then you may need an auto insurance policy with a $300,000 limit. If you have boat insurance, you might need a $100,000 boat insurance policy for a boat under 26 feet long and 50 horsepower. You most likely won't qualify for umbrella insurance if these requirements are not met.
How Much Umbrella Coverage Do I Need?
You can determine how much umbrella coverage by taking the following steps:
First, identify the liability limits of your primary policies.
Next, calculate the total value of your assets, such as your home, life savings, investments, cars and rental properties.
Finally, estimate any future earnings you'll lose if a court makes a judgment against you. You may lose your investments, rental property or have your paychecks garnished.
When determining how much umbrella insurance you should buy, remember that employer-sponsored retirement accounts are protected from lawsuits as are 401(k)s and Employee Retirement Income Security Act of 1974 (ERISA) funds. Individual Retirement Accounts (IRAs) are not protected from lawsuits, except for money rolled over from employer-sponsored accounts. Some states, however, protect IRA accounts and home equity under their laws.
How Much Does Umbrella Insurance Cost?
The price of umbrella insurance will depend on how much coverage you buy. According to the Insurance Information Institute, you can purchase a $1 million personal umbrella liability policy for around $150 to $300 per year. The second million will cost $75 and $50 for each additional million dollars in coverage.
Umbrella insurance is much cheaper than homeowner's insurance and also cheaper than auto insurance. In many cases, you must buy higher limits on your primary policies before the carrier issues an umbrella policy.
For instance, most homeowners have home insurance policies with $100,000 in liability coverage. Many national home insurers require policyholders to get at least $300,000 of liability insurance before they can buy an umbrella policy. The maximum liability limit you can usually purchase under a homeowners insurance policy is $500,000 in liability coverage.
Many drivers only carry $25,000 minimum liability car insurance coverage and $50,000 per accident. Without an umbrella policy, the maximum liability coverage you may buy is $250,000 per person and $500,000 per accident.
How To Buy Umbrella Insurance
Most national insurers sell umbrella insurance policies, but these carriers require most customers to meet specific requirements before they can get a policy.
You must buy auto, homeowners or watercraft insurance with the recommended liability coverage to qualify for umbrella policies.
If your primary policies don't have enough coverage, you may have to increase them, which means you'll have to pay higher premiums for more coverage limits.
When shopping for an umbrella policy, consider the maximum limits you think you'll need. Some umbrella policies provide maximum levels of $5 million, while others offer limits up to $10 million and $100 million.
Can I Buy Umbrella Insurance Separately?
Yes, you can buy umbrella insurance separately. In some situations, you may be better off, like in these examples:
You own multiple real estate holdings. Most insurance carriers only offer coverage for a few properties under a homeowners policy.
You own real estate held in a limited liability company (LLC). In this case, you may need a specialty umbrella policy.
A household member has a poor driving record. For example, an auto insurance carrier or homeowners insurer won't allow you to buy an umbrella policy if your teen has had multiple car accidents or you've had DUI charges.
You own a home-based business. Homeowners policies don't cover losses associated with business transactions. You may need a separate policy that offers liability coverage.
Have Peace of Mind With Umbrella Insurance
An umbrella policy is personal liability coverage that protects your assets when you or a household member are found liable for damages or injuries or should you face certain lawsuits or liability claims. Umbrella coverage pays for any judgment that exceeds your primary insurance policy limits.
Most insurance companies require certain coverage limits on a base policy before selling you umbrella coverage, so it's important to have the right homeowners insurance and auto insurance policies in place first. SmartFinancial can help you find the best coverage at the lowest rates.