Should You Get Umbrella Insurance?

Umbrella insurance protects you if you are liable for expenses that exceed your underlying liability coverage on your existing insurance policies, such as your home or auto insurance. You can be found liable if you or a member of your household damage someone's property or cause injury to their body.

If you have car insurance, home insurance, or renters insurance, you already have liability coverage on these existing policies. So, what is the point of then adding an overarching level of liability protection by purchasing an umbrella policy?

There are two reasons. First, an umbrella policy has significantly higher liability limits than the other types of insurance mentioned above. A standard homeowners or renters policy might offer a base amount of $100,000 worth of liability coverage, but an umbrella policy typically starts with $1 million worth of coverage.

Due to this higher limit, umbrella policies will cover damages that exceed your underlying insurance policies. For example, say that you had auto insurance with liability coverage of $50,000. One day, you are driving, run a red light, and crash straight into another vehicle.

For sake of example, let's assume that it was your unlucky day and you hit an expensive sports car. The damages totaled up to $85,000. Your auto policy would pick up the bill up to the policy limit of $50,000. If you also had an umbrella policy, it could cover the excess damage of $35,000.

Secondly, an umbrella policy may cover other perils that your car and homeowners policy will not. For example, if someone accuses you of slander, an umbrella policy can help pay your attorney fees and other costs you may incur from defending yourself.

An umbrella policy can protect you from damage to others property or body, legal costs related to these problems, defamation, libel, slander, and others. It will not cover you protect you from business losses, criminal acts, written or oral contracts, intentional acts of injury by you, damage from war, and more.

Remember, an umbrella policy is primarily designed to protect you from damage you cause to others property or body. If you intentionally commit an act or incur injury to yourself or damage to your property, your own umbrella policy will not cover you.

Umbrella insurance is not a mandated coverage like auto insurance or homeowners insurance if you have a mortgage. For this reason, there is not an exact rule on who should have an umbrella policy. However, the people who should have an umbrella policy typically fall into two categories.

Certain things in your life can increase your exposure to liability and thus may be a good reason for you to buy an umbrella policy. This can include things like a dog that is skittish when meeting new people, teenage drivers, trampolines and pools, hosting frequent parties in your home, and more.

Think about it like this. Say you have a 16 year son who recently got his driver's license. You obviously hope that he will be safe on the road, but the reality is that due to your son's lack of driving experience, there is a higher likelihood that he could cause an accident than a more experienced driver such as yourself.

If he causes a severe accident which results in damages that exceed your auto insurance coverage, you would want to have an umbrella policy to cover the additional expenses. This likely seems obvious that this increases your liability, but others are not as easily seen.

For example, say that you recently bought a trampoline to put in your backyard for your kids. One of your neighbors kids comes over and gets injured on the trampoline. Your neighbors may hold you liable for this and take legal action if applicable.

You would hope not, but you never know for sure. The point being made here is that lots of things in life can increase your liability. It is well worth it to pay a small premium each month for the peace of mind that an umbrella policy brings when you have these things in your life.

Without an umbrella policy, you have the possibility of losing certain assets if you are found liable for causing injury to a person's body or damage to their property. For example, say that you hit a pedestrian with your car that you did not see crossing the road.

The pedestrian sustained severe injuries that resulted in medical bills amounting to $150,000. Say that your liability limits on your auto policy were only $100,000. Since you hit the pedestrian, you are likely going to be on the hook for the additional $50,000.

If you have certain valuables or assets, they may be used to compensate the pedestrian you hit depending on the circumstances. Some of these assets can include real estate, jewelry, bank accounts, certain business assets in certain circumstances if you are a business owner, and other valuables.

Let's continue with the example above. If you had $100,000 saved in a bank account, but the injuries that you caused to the pedestrian exceeded your auto liability limits by $50,000, the money in your bank account may be used to cover that difference.

Keep in mind that what can be taken from you in a lawsuit depends on applicable laws in your area. To get an idea of what assets could be taken from you if you are found liable for damages that exceed your other insurance policies, you must consult an attorney.

The point here is that having umbrella insurance should be viewed as a necessity if you have assets or things of value. You may think that you won't ever find yourself in a lawsuit, but you cannot guarantee that which is why you should opt for an umbrella policy.

One of the reasons that can come into play when deciding whether or not to get umbrella insurance is cost. You might have a preconceived notion that umbrella insurance is expensive. After all, if you get $1 million of coverage that is going to cost you an arm and a leg right?

Nope. Umbrella insurance is affordable. You can likely find an umbrella policy that offers $1 million in coverage for $20 to $40 per month. It is a small price to pay for the protection and peace of mind that the policy will provide. The factors listed below can impact the amount you will pay for coverage.

1) Your location - Insurance rates will vary depending upon where you live. This is a factor that is out of your control. You might live in a state in which umbrella policies are cheaper or you might live in a state in which umbrella policies are more expensive.

2) Your credit history - If you have a poor credit score, you might pay more for coverage. Insurance companies have found that individuals that have lower credit scores are more likely to make claims which means the insurer charges them more for coverage.

3) How many vehicles you own - If you only have a single vehicle in your household, you will pay a lower rate than someone who has lots of vehicles in their households. More vehicles mean more opportunities for accidents that could result in liability claims.

4) Driving record of your household - If your household has a less than stellar track record, you will likely pay more for coverage. The more accidents, speeding tickets and traffic violations your household has makes your household a greater risk for the insurer to cover.

5) Teenagers in your household - Teenagers are going to be more prone to accidents than other drivers in your household. This increases the risk that a liability claim could arise in which you would need to use your umbrella policies which means you will pay more for coverage.

6) Coverage amount - The more coverage you buy, the more you will pay. An umbrella policy with $1 million worth of coverage is going to be cheaper than an umbrella policy with $5 million worth of coverage.

The exact amount of coverage you need will depend on your unique situation. Umbrella insurance starts with a base amount of coverage of $1 million. For some individuals, this might be enough but for others it won't.

If you have things in your life that increase your liability, but do not have significant savings or assets you will likely be fine with $1 million in coverage. For example, say that you have 4 cars in your household with a few teenage drivers and frequently host dinner parties at your house.

If you have these things in your life, but do not have significant savings, $1 million in coverage may be enough. However, if you do have significant savings or assets, you should opt for a higher coverage amount to protect those assets.

For example, say you had a real estate portfolio valued at $2 million. Instead of getting $1 million in coverage, you could double your coverage to $2 million. At the end of the day, the amount of coverage you should get will come down to your needs and your risk tolerance.

If you need help deciding how much coverage you should have, consult your insurance agent. Your insurance agent will not only help you analyze your coverage amount needs, but will also be able to answer any additional questions you may have regarding umbrella insurance.

1) Meet the minimum auto and home liability requirements - All insurers require you to have certain underlying liability coverage limits on your existing home/renters and auto policies. Insurers do this to decrease the risk that you would have to use your umbrella policy.

Here is how it works. Let's say that you currently have $100k/$300k of bodily injury coverage and $50,000 of property damage coverage on your auto policy. You also have $100,00 worth of liability coverage on your home or renters policy.

Before your insurer will let you purchase an umbrella policy, you might have to upgrade your auto coverage to have $250k/$500k of bodily injury coverage and $100,000 of property damage coverage. You might also have to upgrade your home/renters liability coverage to $300,000.

The exact requirements vary by insurer so make sure to reach out to them to see if your current coverage meets the requirements or if you would have to buy more. If you don't have enough coverage, you will need to buy more to meet the requirements of your insurer before purchasing an umbrella policy.

If you have to buy more coverage, you can typically ask your insurer to provide you with a quote that would detail how much the increased liability coverage on your auto and home or renters policy would cost you before purchasing more coverage.

2) Understand how much coverage you need - Before you get a quote from your insurer, it is important to be aware of how much coverage you need. You can look at things in your life that increase your liability, be aware of your savings and assets, and consult your insurance agent.  

3) Ask your insurance agent for a quote - Once you know how much coverage you need, simply ask for a quote. Your insurer may confirm current information or gather additional information to generate a quote.

4) Submit your premium to bind coverage - If you like the quote that you are provided and are confident that it provides you enough coverage simply fill out any necessary paperwork and submit your first premium payment to bind the coverage.

The bottom line is that umbrella insurance protects you if you are liable for expenses that exceed your underlying liability coverage on other insurance policies as a result of you injuring another person or causing damage to their property

If you are on the fence about getting umbrella insurance, understand that it is an affordable way to protect your financial life by reducing your liability. You do not want to find yourself in a situation in which you could have been protected, but opted not to get an umbrella policy.