What Is Umbrella Insurance and Why Get It?
- Umbrella insurance adds liability protection to your existing insurance.
- An umbrella policy costs about $25 a month for the first $1 million in coverage.
- Umbrella insurance also covers your legal defense in an injury lawsuit.
What is umbrella insurance?
You can also add an umbrella’s protections to other policies you may have. This usually includes renters insurance and insurance for a rental property, boat and/or RV.
Most major insurance companies offer umbrella policies in $1 million increments up to $5 million. Some go up to $10 million or more.
How much does umbrella insurance cost?
The actual rate you pay for umbrella insurance depends on factors like:
- The number of cars and drivers in your home
- The number and types of properties, other vehicles and watercraft you have
- Your driving record and insurance claims history
- Your credit (in most states)
Companies with umbrella insurance usually only offer it to customers who get at least one other policy from them. This often has to be a home or auto policy, and sometimes both. Most companies can add an umbrella quote to your car or home insurance quote.
Why get umbrella insurance?
Umbrella insurance kicks in if the amount you owe an accident victim goes above your base policy’s liability limit. Without it, a severe accident could deplete your savings. Or you could face a wage garnishment order or property lien.
Scenarios that can lead to a large insurance claim against you include:
- You or your teen cause a multi-car accident
- A roofer injured at your home sues you for negligence
- A friend gets hurt in an accident on your boat
What does umbrella insurance cover?
For example:
- If you have $250,000 in auto liability and owe a victim $200,000, your car insurance covers the entire claim.
- If you owe the victim $800,000 with that same $250,000 liability limit, your umbrella policy covers the extra $550,000.
Umbrella insurance usually also covers your legal costs if you’re sued over a liability claim. These alone could add up to a few thousand dollars or more.
What umbrella insurance does not cover
Since it only applies to liability claims, umbrella insurance does not cover:
- Injuries to you or members of your family
- Damage to your own property
- Injuries or damage you cause on purpose
Personal umbrella insurance vs. business insurance
With the exception of some rental properties, a personal umbrella policy also does not cover commercial or business activities.
- A commercial umbrella policy can add to the liability protections in a business’ insurance policy.
- You usually need malpractice insurance, or an errors-and-omissions policy, to protect against professional negligence claims.
Umbrella insurance vs. excess liability
The terms umbrella and excess liability insurance are sometimes used interchangeably. However, excess liability insurance is slightly different from a true umbrella policy.
- Excess liability insurance only covers injuries and damage from causes already covered by one of your base policies. If your homeowners policy does not cover personal injury The personal injury coverage in umbrella insurance covers you for things like invasion of privacy, slander and libel. These risks are not always covered by homeowners insurance. , excess liability won’t cover this, either.
- Umbrella insurance covers a broader range of circumstances than your base policies. Even if your homeowners policy does not cover personal injury, a true umbrella policy normally does. However, you may have to cover a portion of a claim that isn’t covered by your base policy out of your own pocket.
How much umbrella insurance do I need?
It’s also good to factor your future earnings into your calculation. This can protect you from having your wages garnished to cover an accident victim’s expenses.
You usually also have to have high liability limits in your base insurance policies to get umbrella insurance. For example, Allstate requires umbrella customers to have at least $300,000 in homeowners liability. It also requires your car insurance to have at least $250,000 in bodily injury liability coverage per person.
Is umbrella insurance worth it?
No one can predict when an accident will happen. And the costs of an injury or property damage claim can get expensive fast.
Along with medical costs, an accident victim can sue you for lost wages and pain and suffering. These costs can grow especially large if the victim dies, suffers a permanent injury or has to miss work for several weeks.
Getting umbrella insurance is an affordable way to prevent a moment of inattention or bad luck from devastating your finances.
On the other hand, if your net worth is less than $300,000 or so, your base insurance policies may provide all the liability coverage you need. Just remember to increase your liability protections as your wealth grows.