Liability insurance protects your wallet if you are responsible for injuries to another person or their property. This type of coverage could save you from financial ruin if someone sues you and wins a big judgment.
Some people decide that the liability coverage that comes with their homeowners or auto policy is not enough. In such instances, a person might purchase an umbrella policy to extend their liability coverage.
“Think about umbrella coverage as a safety net or extra liability insurance that starts paying losses after you’ve reached the limits of your basic policy,” says Carole Walker, executive director of the Rocky Mountain Insurance Association.
Does a liability policy make sense for you? Before deciding, it’s crucial to learn more about these policies.
- Umbrella policies provide extra liability coverage above what you get with a homeowners, renters or auto policy.
- This type of coverage makes the most sense for people with substantial assets to protect.
- An umbrella policy does not offer extra protection for your home, auto or possessions.
Is an umbrella policy a waste of money?
Is an umbrella policy a waste of money? That depends.
For people of modest means, umbrella insurance might not make sense. Those who do not own a home or have little money in savings and investments might not need the extra financial protection that an umbrella policy offers.
However, if you have significant assets to protect, an umbrella policy can offer a relatively low-cost way to add $1 million, $2 million or more in additional liability protection.
“In our litigious society, you don’t need to be a millionaire to require an extra million dollars in liability coverage,” Walker says.
Hopefully, you will never need the coverage. But if you are sued and lose a big judgment, an umbrella policy can potentially keep you from losing thousands or even millions of dollars.
What is the purpose of an umbrella insurance policy?
A standard homeowners or auto policy offers liability coverage, but the amount may be limited to just a few hundred thousand dollars. For example, a typical homeowners policy offers a minimum of $100,000 in liability coverage, with policyholders having the option to increase their coverage to as much as $500,000.
However, that might not be enough coverage for people who have substantial assets, such as an expensive home and a lot of money in investments. For these folks, an umbrella policy can make sense.
An umbrella policy provides additional liability coverage once you exhaust the limits of the liability coverage on your homeowners, renters or auto policy.
This extra coverage can be a lifesaver. If you are in an auto accident and are responsible for someone’s serious injuries — or even their death — you could be sued for hundreds of thousands of dollars or more.
An umbrella policy might provide the extra financial protection you need in such circumstances.
“You need to consider what could be at stake if you had a claim or lawsuit filed against you,” Walker says.
Who needs umbrella insurance and why?
Umbrella insurance makes the most sense for:
- Those with a high net worth may need several million dollars in additional liability coverage.
- Those who want more than $500,000 in liability coverage, which is the limit on most homeowners policies.
- Those who drive a lot are at greater risk of being in an accident.
- Those who own dogs, swimming pools, trampolines, etc., which increases liability risk.
Utilize our umbrella insurance calculator to determine if you require this additional coverage
What is covered by an umbrella policy?
An umbrella policy is a form of liability coverage. That means it protects you from damages to another person or their property.
The coverage kicks in once you have exhausted the liability limits on your homeowners, renters or auto policy. Furthermore, you must satisfy the minimum amount of liability insurance through your homeowners and auto policies.
What is not covered by an umbrella policy?
An umbrella policy does not provide additional coverage to reimburse you for damages to your home, auto or possessions.
In addition, personal umbrella coverage does not protect any business activity. So, if you own a small business, you will need a separate policy if you want umbrella coverage for the business.
What are the benefits of an umbrella insurance policy?
An umbrella policy has several benefits. This type of policy:
- Offers liability protection far beyond what you can obtain with most homeowners, renters or auto policies.
- Helps you pay for judgments if you are responsible for damaging another person or their property.
- Is available at a relatively affordable cost. For example, Erie Insurance says you can get about $1 million in coverage for just $20 monthly.
“You will pay less if your chances of being sued are fairly slim,” Walker says.
For example, she says your premiums are likely lower if you own only one home or are a low-risk driver.
“On the other hand, if you own a house, a lake cabin, along with a boat and a snowmobile, you’ll pay for having considerably more exposure to risk,” Walker says.
What are the disadvantages of umbrella insurance?
An umbrella policy is not suitable for every person or every situation. This type of policy:
- Might not make sense for someone with little to no assets to protect.
- Does not offer coverage for your small business or side hustle.
- Does not protect your own home, car or possessions.
In addition, you will have to purchase more liability insurance on your homeowners or auto policy before qualifying for umbrella coverage.
“Many insurance companies won’t sell you an umbrella policy unless you already carry a certain amount of basic liability coverage,” Walker says.
She says the amount is generally $300,000 of underlying coverage on your homeowners insurance policy and $250,000 of underlying coverage on your auto insurance policy.
“Many companies also require that you insure both your home and car with them before they’ll sell you an umbrella,” Walker says.
Learn about the top-rated umbrella insurance companies
Final thoughts on umbrella insurance policies
An umbrella insurance policy probably does not make sense for everyone. But for some people – especially those with substantial assets to protect – this type of policy offers relatively affordable liability coverage that could keep the policyholder from financial ruin in the wake of a lawsuit.
Resources & Methodology
Sources
- Insurance Information Institute. “How much homeowners insurance do I need?” Accessed September 2023.
- Insurance Information Institute. “Umbrella liability policy” Accessed September 2023.
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