What Is Umbrella Insurance?

What Is Umbrella Insurance?

Umbrella insurance is excess liability insurance that extends beyond the limits of your auto, home or watercraft insurance policy. Typical auto insurance policies have $250,000 liability coverage limits; homeowner policies may top out at $300,000. Yet, your liability can exceed these limits if you're at fault in a major car accident or someone sustains an injury while visiting or working at your home.

Learn more: How Much Car Insurance Do I Need?

Umbrella insurance may also provide coverages that aren't included in your regular auto and homeowners policies, such as protection against lawsuits filed against you for libel or slander, or liability coverage when you're traveling outside the U.S. Umbrella coverage usually extends to all members of your immediate family, but it doesn't cover liability for any businesses you own.

Although standalone umbrella insurance policies exist, most insurance companies require you to carry standard auto and homeowners policies with their company before they'll sell you umbrella insurance. They may also require a minimum level of liability coverage on your base policies to qualify for umbrella coverage.

How Does Umbrella Insurance Work?

Umbrella insurance picks up where your base insurance coverage ends. So, if a pair of party guests injure themselves in your pool, your regular homeowners policy might cover the first $300,000 in personal injuries (up to the policy's limits) and your umbrella insurance would cover any additional liability, up to the limits of your umbrella coverage.

Umbrella coverage is typically sold in $1 million increments, up to $5 million in coverage or more.

Example of an Umbrella Insurance Policy

Here's an illustration of how an umbrella policy might work in the event of a car accident:

You hit a pothole and splash hot coffee on yourself, causing you to veer into the opposite lane and collide with multiple cars.

• Two cars are totaled and another sustains damage. The combined damages of $97,000 are covered under your regular insurance policy.
• A driver and her two passengers are hospitalized and require $250,000 in medical treatment for their injuries. They file lawsuits totaling more than $750,000 to compensate for ongoing medical treatment, recovery and lost wages, as their injuries don't allow them to return to work for six months after the accident.
• You hire an attorney. Your legal defense costs more than $125,000.

Your regular insurance has personal injury coverage of $250,000 and pays for the initial medical treatment. But the $750,000 plus $125,000 in legal costs fall under your $1 million umbrella policy. Without that coverage, you would be held responsible for these additional costs. You could lose your assets and—if unable to pay—see your future earnings garnished. A single event could easily become a long-term drag on your personal finances and a major source of stress.

What Does Umbrella Insurance Cover?

Umbrella insurance covers liability that exceeds the limits of your regular auto and home policies, along with a few additional coverages that may not be included in your regular insurance. Here's is a quick overview of what a typical umbrella insurance policy might cover:

• Personal injury to another party
• Property damage to another party
• Lawsuits against you for defamation, libel, slander or invasion of privacy
• Lawsuits against members of your immediate family
• Your legal defense and court costs in a lawsuit
• Liability when you're traveling outside the U.S.

Because coverages can vary, ask your insurer about any areas of concern you may have. For example, if you'd like your umbrella policy to cover an elderly parent, check with your insurance company to make sure your parent is eligible.

What Isn't Covered by Umbrella Insurance?

Outside of excess liability and the items listed above, umbrella insurance does not cover a variety of common risks, including:

• Personal injury to you
• Damage to your own property
• Business liability
• Contract liability
• Criminal or intentional acts

In addition, some high-risk activities may be excluded from coverage. Be sure to inquire about the following if they are important to you:

• Breed exclusions for dogs: If your pup is on the list of banned breeds, you may not be eligible for coverage.
• Restrictions on your activities: Are you an expert ax-thrower? Make sure that your favorite pastime isn't excluded from coverage.
• Coverage for your boat or other recreational vehicle: Although watercraft insurance is often covered by umbrella insurance, this could be a significant oversight if it's not.

Pros and Cons of Umbrella Insurance

Here's a quick look at some of the pros and cons of umbrella insurance.

Learn more: Should I Have Umbrella Insurance?

How Much Does Umbrella Insurance Cost?

Umbrella insurance costs $383 per year for $1 million in coverage, according to a report from high-net-worth insurance provider ACE Private Risk Services. Your cost will vary, depending on your insurance company and the following factors:

• Where you live
• Your risk profile
• Family members
• Your claims history

Your premium will also depend on how much coverage you choose. Umbrella insurance is typically sold in $1 million increments. Adding additional increments may cost less than your initial $1 million does, so you may want to ask your insurance company for a quote on multiple coverage levels; more coverage may cost less than you think.

If you're pricing umbrella insurance, you may want to get a few different quotes to compare. However, be prepared to shop your auto, home and umbrella policies as a package to make sure you'll qualify for umbrella coverage and for multi-policy discounts.

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Do I Need Umbrella Insurance?

Umbrella insurance is entirely optional, but it may be worth considering if you have assets worth more than your regular insurance policies' liability limits or a higher-than-average risk profile.

Gauging Your Assets

One starting point is to match your current liability coverage against your assets:

• Estimate your assets. Add up the equity you have in your home, your savings, investments and retirement funds.
• Check your coverage. Look for the liability limits on your auto and home policies.
• Measure the gap. Subtract the lowest coverage limit from your total assets. Example: If your home policy has a $300,000 limit and your auto policy has a $250,000 limit, subtract $250,000 from your total assets.

You may want umbrella coverage that matches or exceeds the value of your assets, minus existing coverage on your auto or home policy.

Sizing Up Risk

You don't have to be a daredevil to carry extra risk. For example, if you have teenagers in the house, you may be at additional risk for auto accidents, accidents at home or even lawsuits, if your teen posts something defamatory on social media, for example. Do you own multiple homes? Does your home have a pool? Do you own rental property? These—along with a multitude of other major and minor risk factors—could help make the case for umbrella insurance.

You might consider umbrella coverage if any of the following apply to you:

• You own a rental property or loan out your home
• You have teens living at home
• You coach a sports team or volunteer
• You host parties or large gatherings at home
• You employ people who work at your home
• You have a dog
• You serve on a charity board
• You do sports or other activities where you might injure someone

This is far from an exhaustive list. Any activity you participate in—including routine driving and walking your dog—is potentially risky. However, try to take stock of your potential liabilities and decide whether additional coverage might give you peace of mind.

Learn more: Can You Be Over-Insured?

The Bottom Line

Although umbrella insurance is optional, it can provide a high level of additional coverage for a relatively low cost. Lawsuits happen, accidents occur and damages can add up quickly. Umbrella coverage relieves at least some of the financial anxiety that comes with life's everyday risks.