What Is Umbrella Insurance and Who Needs It?

Your insurance only covers so much. Whether it’s homeowners, auto, boat or another kind of insurance you might end up in a situation where you’re facing something that your insurance won’t cover. This is where umbrella insurance comes in — it’s extra protection to help fill the gaps.

Read on to discover everything you need to know about what umbrella insurance is and whether or not you should consider purchasing it.

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      The basics of umbrella insurance

      Umbrella insurance is extra liability coverage that goes above and beyond the normal limits of auto, homeowners or watercraft insurance and which kicks in after you reach the liability coverage limit on your other insurance policy or policies. It’s extra protection for anyone that is afraid of being sued over damages following an accident. However, it’s more than bodily injury and property damage liability coverage. It also protects you against libel, slander and false arrests, and provides liability protection for rental units if you’re a landlord.

      Umbrella insurance is especially important if you have a lot of valuable assets that you want to protect (for both your future and your children’s future). Assets in danger without umbrella insurance are:

      • Future income
      • Investments
      • Liquid assets
      • Personal property
      • Real estate
      • Retirement accounts

      And while umbrella insurance isn’t necessary for everyone, it tends to be quite affordable. You can buy a $1 million personal umbrella liability policy for an average of about $200 per year. As such, it’s a good option for anyone seeking additional protection beyond the standard liability protection.

      How does umbrella insurance work and what does it cover?

      To submit a claim, the underlying liability coverage on your primary homeowners or auto insurance first needs to be exhausted. Once it is, you will need to speak with your insurance company about dipping into your umbrella insurance. For this reason, it is important to stay in contact with your insurance provider during the whole process and to provide any necessary documentation as it is requested.

      Umbrella insurance doesn’t just protect you (the policyholder). It also protects anyone else in your family or household, too.

      Currently, umbrella insurance protects you against certain lawsuits, injuries, property damage and various personal liability situations.

      What doesn’t umbrella insurance cover?

      Though umbrella insurance protects you against the unexpected, even an umbrella insurance policy doesn’t cover everything. Here are exclusions you can expect to find with a standard umbrella policy:

      1. Damage caused on purpose. If you purposely drive your car into someone else’s car, an umbrella policy won’t cover any damages you inflicted, nor will it protect you in court. On a similar note, if you get into a physical altercation with someone at your home or business, you will also be out of luck. Intentional harm is never protected.
      2. Damage done to your property. Though umbrella insurance offers a great amount of protection, it’s ultimately just liability coverage. This means it’s all about protecting other people for damages you may have done to them or their personal property. For any damage done to your property, you will need to refer to your auto or homeowners insurance. If you’re looking for more personal property protection, speak to your insurance provider about other options.
      3. War. No policy protects against war-time damages.
      4. Liability you agreed to. If you sign a document stating you will take full responsibility for your actions or any damage that may occur then your insurance company is released from their coverage responsibility for those events.
      5. Liability from professional activities or business. A standard umbrella policy won’t suffice. You’ll first need business liability before you can purchase a businesses umbrella policy.

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      Who should consider umbrella insurance?

      Anyone that has a significant amount of assets should consider an umbrella policy. A good rule of thumb is to consider purchasing umbrella coverage when your assets are greater than your policy’s liability coverage.

      Here are some examples of people that should purchase umbrella coverage:

      • Mark and Patty like to hold numerous house parties in the winter before they head south to their summer home. Because everyone in the neighborhood is invited, the parties often spill outside. The problem is that the stone steps leading out of the house and into the courtyard tend to ice over at night. They both know all it would take is one good fall for someone to sue them for damages. If this happens, an umbrella policy would protect them from any costs that their primary homeowners liability coverage wouldn’t cover.
      • Jane’s son, Patrick, has recently started driving. Unfortunately, he’s not the best of drivers yet. If he were to cause a severe accident, Jane’s liability would quickly max out. If the injured party were to sue on top of that, she could lose all of her personal real estate assets that she’s built up over the years as a successful realtor. In this case, umbrella insurance would help cover lawsuit costs, liability coverage and medical expenses that Jane’s primary auto insurance policy might not be able to cover.
      • Robert owns a very profitable landscaping business that he’s built from the ground up. He’s now a multi-millionaire. Though he gets along with all of his staff, he does like to joke around after hours. In a moment of clarity he realizes all it would take is someone claiming he verbally assaulted them for him to lose all of his hard work. An umbrella insurance policy would protect him from the lawsuit by covering additional costs and liability.

      Each person in the above scenario should speak to an agent about purchasing additional protection.

      How much does umbrella insurance cost?

      The total cost for umbrella insurance depends on how much coverage you need, where you live and the amount of risk you bring to the table.

      Most insurance companies require you to purchase the maximum amount of liability before allowing you to purchase umbrella insurance and the cost for doing so will vary depending on where you live and what you’re insuring. However, the good news is that, for the most part, umbrella insurance policies are relatively cheap compared to the amount of protection they offer. According to the Insurance Information Institute, a $1 million umbrella policy costs, on average, between $150 and $300 a year (or about $25 a month).

      We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

      Lauren Ward

      Contributing Writer

      Lauren Ward is a personal finance writer living in Virginia’s Blue Ridge Mountains with her husband and three children. In her spare time she enjoys board games and gardening.

      Reviewed by

      • Aylea Wilkins
        Aylea Wilkins
        Insurance Editor

        Aylea Wilkins is an editor specializing in insurance for The Simple Dollar. After getting a degree in European studies and editing from Brigham Young University, she worked as a writer and editor for a variety of small websites before transitioning to the insurance field.