Most insurance policies you might have, like car insurance or renters insurance, have built-in liability coverage. In a nutshell, liability insurance pays for your legal defense in third-party claims of bodily injury or property damage. It prevents you from paying out-of-pocket if you are found responsible for the claim.
But even though insurance can be a lifesaver in these situations, it doesn’t offer unlimited protection. Meaning your insurance company will only pay up to a certain amount, called the policy limit, in the event of a claim (like an at-fault car accident, for example).
So, what happens if you need more liability insurance than your standard policies provide? This is where umbrella insurance comes into play.
In this guide, we’ll explain the ins and outs of umbrella insurance — what it covers, how much it costs, who needs it, and where you can get it.
What is umbrella insurance?
Umbrella insurance is a type of insurance that provides additional liability coverage above and beyond what your standard insurance policies offer if you get sued. The main purpose of umbrella insurance is to protect your assets in personal liability claims where you could be held financially responsible.
For example, imagine that you cause a serious car accident with multiple injured drivers. The liability limits of your basic auto insurance policy may not provide enough coverage to compensate each driver for their medical bills.
Read more: Auto insurance liability limits: how much do you need?
In this case, an umbrella insurance policy would provide more coverage and reduce the amount of money you would have to pay out-of-pocket. Without umbrella insurance, you would be responsible for paying the difference between your insurance policy’s limit and the total cost of the medical expenses using your own money.
What does umbrella insurance cover?
Every umbrella insurance policy is slightly different. However, all policies will protect you financially in liability claims, including:
- Bodily injury claims.
- Property damage claims.
- Personal liability claims.
- Slander and libel claims.
Specifically, umbrella insurance will provide compensation for the following costs:
- Your legal defense and court costs.
- A settlement with other parties.
- A judgment with other parties.
Although liability insurance is typically thought of in relation to auto, home, or renters insurance, you can apply umbrella insurance to any personal liability claim you might face. For example, let’s say you leave a scathing review after a poor hotel experience and the hotel sues you for defamation. You could use your umbrella insurance policy to pay for your legal fees.
Another thing to know about umbrella insurance is that it covers you anywhere in the world. So, if you accidentally hit a pedestrian while driving a Vespa in Italy, your umbrella insurance policy would apply if the pedestrian sued you for their medical bills and pain and suffering.
What does umbrella insurance not cover?
Umbrella insurance has a few limitations. Here are some things that umbrella insurance won’t cover:
- Your own injuries or property damage.
- Liability claims related to your business.
- Liability claims related to a breach of contract.
- Intentional acts and crime.
Before you purchase an umbrella insurance policy, it’s a good idea to review the policy details with an agent, as every policy is a little different. For instance, some umbrella insurance policies exclude coverage for boat liability claims, unless your boat is insured.
Umbrella insurance vs. excess liability insurance
If you’re in the market for additional liability insurance, you might have come across a policy called excess liability insurance. Although umbrella insurance and excess liability insurance are sometimes used interchangeably, they are actually two separate policies.
Excess liability insurance increases the liability coverage limits on insurance policies you already have. It’s usually sold as an endorsement.
For instance, imagine that you have $500,000 in liability insurance on your homeowner’s insurance policy. After you install a pool, you decide that you need more coverage. In this case, you could purchase excess liability insurance and raise your coverage limit to $1 million.
Unlike umbrella insurance, however, excess liability insurance only applies to the policy you purchase it for. If you get excess liability insurance on your renters insurance policy, it doesn’t apply to your auto or home insurance.
In addition, excess liability insurance does not cover non-insurance claims. For example, if you or one of your family members was sued for libel or slander, excess liability insurance would not provide any coverage for your legal fees.
Read more: Renters liability insurance: what it covers, what it costs, and who needs it
How much umbrella insurance is enough?
Because umbrella insurance is designed to protect your personal assets in the event of a personal liability claim, the right amount of coverage is different for everyone. Ultimately, it depends on your net worth and the assets that could be at risk if you were found responsible for a liability claim.
To calculate how much umbrella coverage you should have, consider the following:
- The physical assets you own, like cars and houses.
- The amount of money in your savings account.
- The amount of money in your investment portfolio.
As a general rule of thumb, you should purchase enough umbrella insurance to cover your net worth in full. This will ensure that your personal assets are not at risk if you get sued.
Unlike home or auto insurance, umbrella insurance policies come with very high coverage limits. Most insurance carriers sell umbrella insurance with $1 million to $5 million in coverage.
Read more: Net worth is your most vital financial stat — do you know yours?
Remember, even if you don’t have an exceptionally high net worth, your physical and financial assets can be seized in court if you get sued and don’t have enough money to repay the plaintiff (the person or company suing you).
The cost of umbrella insurance
It sounds like umbrella insurance would be expensive, but most policies are more affordable than you might imagine. Most insurance companies estimate that a $1 million umbrella insurance policy costs between $150 to $300 per year, with higher premiums for higher coverage limits.
The cost of umbrella insurance depends on a few different factors, though. Here are some of the biggest ones:
- Your insurance company.
- The amount of coverage you purchase.
- Your unique risk factors.
If you’re on the fence about getting umbrella insurance, the extra cost probably won’t raise your insurance premiums by too much. But keep in mind that the more risk you face, the more expensive your premium will be. Certain situations, like keeping firearms in your house, can have a bigger impact on the cost of your coverage.
Who needs umbrella insurance?
Umbrella insurance is never a legal requirement, but it can be beneficial for many people. However, you should strongly consider getting umbrella insurance if you have a high net worth or are at an increased risk of getting sued.
If you fall into one of the categories below, you can potentially benefit from umbrella insurance:
- You own a high-value home.
- You have a significant financial net worth.
- You frequently host parties at your home.
- You have a pool, trampoline, dog, or other things in your home that could cause injury to others.
- You are concerned about getting sued while traveling internationally.
- You are a landlord or own rental properties.
Where to buy umbrella insurance
Most major insurance companies sell umbrella insurance policies. Some offer quotes online, while others require you to call an agent. However, every umbrella insurance policy is different, so it’s important to compare a few policies before you purchase one.
For example, most insurance companies sell umbrella insurance policies with coverage limits of $1 million to $5 million, but you can find policies with higher limits. In addition, certain policies may have exclusions. You’ll want to make sure the policy will cover you sufficiently based on your lifestyle and the unique risks you face.
At this point, you might be asking yourself, “Is umbrella insurance worth it?” The answer is: it depends. Every person has different insurance needs, and that goes for umbrella insurance, as well.
If you have a high net worth or have an increased risk of getting sued, having umbrella insurance can provide an extra layer of protection and added peace of mind. Even if you don’t have a substantial savings account or multiple real estate properties, having umbrella insurance can still be useful.
Personal liability claims happen unexpectedly, whether your normally friendly dog bites a delivery driver, you hit another skier on the slopes, or you cause a major pileup on the highway. Because most umbrella insurance policies are budget-friendly, it can be a good thing to add to your insurance portfolio.
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