Umbrella Insurance: What Is it and Should I Buy It?

Fran Majidi
June 11, 2020

Umbrella insurance is a standalone policy that you buy to add extra coverage to your existing liability insurance. It can add extra liability coverage to an auto insurance policy and even to a homeowners insurance policy. For example, what if you were sued after a car accident and you lose the lawsuit for an amount that far exceeds what your car insurance company will pay? It happens. Or, what if someone came to your home and tripped over your front steps and ended up in the hospital? Your homeowners insurance offers liability but what if it doesn’t cover all the medical expenses? That is where umbrella insurance comes in. And if you have assets and don’t have this inexpensive protection, you should reconsider your options.

What Is Umbrella Insurance?

Umbrella insurance is a personal liability coverage that you buy as a standalone but that which adds coverage to an existing home insurance policy, auto insurance policy or watercraft or RV insurance policy. If you have a business, there is also commercial umbrella policy, which acts the same way in extending your liability protection.

If you have a personal umbrella insurance policy, it will cover you as well as other members of your household. It may also cover family members who do not reside in the same household, but be sure to check with your insurer.

Some people wrongly assume that umbrella coverage will protect their assets or property. It does not do so directly. It simply prevents your assets and savings from being garnished due to a lawsuit. Umbrella liability insurance only covers injuries and damages to others.

Another wrong assumption is that just because umbrella insurance often covers wealth and expensive assets, that it is expensive to buy. Umbrella coverage is very inexpensive compared with raising liability limits on an existing policy. However, some insurers expect you to buy the maximum limits on your existing policy before adding umbrella protection.

How Does Umbrella Liability Insurance Work?

Here are some examples:

  • The delivery person trips on a cracked step and sues you. Your home insurance only covers a portion of the medical costs and lost wages that were won in the lawsuit. Your umbrella insurance would pay the remaining balance.
  • Your dog gets out of the yard and attacks a pedestrian or neighbor. You get sued for medical expenses and lost wages. Your home insurance only covers a portion of the cost. Your umbrella insurance would cover the rest.
  • Your son gets into a fist fight and the other boy needs stitches and has a broken arm. You get sued and lose the court case. In most cases, your umbrella would cover what your home insurance does not.
  • You bring your famous pulled pork to work and everyone eats it for lunch. Your coworkers all get sick from food poisoning and they sue you. Your homeowners may pay for the legal bills and your umbrella policy would cover the remainder.
  • You cause an accident that ends up in a pile-on. All four drivers whose cars are badly damaged sue you. Your auto insurance liability will pay up to limits and then your umbrella policy will kick in to satisfy the remainder.
  • Your daughter posts a nasty Instagram post with an unflattering photo of a schoolmate and the girl’s parents sue you for defamation and. Again, umbrella insurance will come through!

Stranger things have happened at potlucks, teenagers having parties in their parents’ home involving alcohol and much, much more. If you’re not careful, you may see a lawsuit that you never imagine possible. And if you don’t have umbrella coverage, you may have to pay for these incidents out-of-pocket.

Umbrella Insurance Cost

You can get an umbrella insurance quote when you get a homeowners insurance quote or an auto insurance quote. It usually makes sense to buy your coverage from the same company. As mentioned before, umbrella coverage is inexpensive. It also depends on how much coverage you buy. The state you live in also affects your rate and so does the risk that you present. Your policy will cost more according to the number of homes or cars you own and the number of household members your policy will cover.

Most $1 million umbrella policies cost between $150 and $300 per year. For a $2 million policy, you’re looking at $225 to $375 a year. For $3 million it’ll cost you between $275 to $425. Add about $50 per year for each million after that.

Umbrella insurance costs very little and pays out so much when you least expect to need it. The reason it’s so inexpensive is because you use your primary policy’s liability coverage first. Some people never even have to use their umbrella coverage, but it’s good to know it’s there in case you ever need it.

What Does Umbrella Insurance Cover?

Umbrella insurance in excess of the limits on a personal liability policy, whether it’s a home or auto policy. It pays for damages and injuries to a third party. Most often, all members of a household are covered by an umbrella policy.

How Much Umbrella Insurance Do I Need?

How much personal umbrella insurance you buy depends on what you own and how much risk you are exposed to. For instance, having children adds the risk of them having an accident in or outside the home. If you have a considerable savings account or own a home, those assets are at risk if you’re ever in a legal battle. Not only will liability insurance pay for damages and injuries, it will cover legal bills.

Also, don’t base how much umbrella insurance you buy on how much you own. For example, let’s use the trip-and-fall accident as a starting point. Let’s say you had to pay $800,000 in damages for medical costs. If your homeowners insurance liability limits were $300,000, for example, you’d owe the remaining $500,000. If you didn’t have umbrella coverage, where would that money come from? You’d be responsible to pay it.

What’s the Minimum Umbrella Insurance I Can Buy?

Most insurance companies sell personal umbrella insurance in $1 million increments with $1 million as the minimum.

Is Umbrella Insurance Worth It?

When you consider the fact that one horrible car accident could mean losing your life’s savings, it’s definitely worth it, especially when it may only cost you $20 or $30 a month. If you’ve got kids, teenagers especially, you can only control them so much. If they get into a situation that ends up in damages and injuries, you’ll want to have sufficient coverage.

The best umbrella insurance is always affordable. However, you may pay quite a bit raising your primary insurance policy’s limits first.

How Can I Save Money on Umbrella Insurance?

One way to circumvent the extra cost of raising your primary liability insurance limits is to buy your personal umbrella insurance from a different insurance company.

You can also raise the deductible, which means you’d have lower premiums. But at $20 to $30 a month for a $1 million policy, the savings would be insignificant.

The best thing you can do is to compare your primary insurance coverage to find the best rate for auto insurance and home insurance. Then see which of the two companies offers a better bundle deal. After you’re done bundling home and auto for a huge savings, buy your umbrella policy elsewhere. Start by saving: compare rates by entering your zip code below.

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