What You Need to Know About Umbrella Insurance

One of the worst feelings we homeowners can have is realizing we’re not covered after a disaster or burglary. Fortunately, this hardly ever happens. Together, our homeowners policies and home security systems are our rocks, covering us 24/7 365 days a year against pretty much any whammy fate can throw in our path. That’s because home insurance is home security.

But what if something goes wrong and you’re not covered? Not only is that a pretty big headache to sort through, but it can also be financially devastating when you’re slapped with huge bills you weren’t prepared for. That’s where umbrella insurance comes in.

Umbrella insurance is essentially an extra layer of liability protection for you and your family that kicks in when your traditional policies won’t cover you. This can come in very handy, but you don’t want to overextend yourself financially either — so let’s dig a little deeper into umbrella insurance to understand what it is and if you even need it.

What Is Umbrella Insurance?

Umbrella insurance is a type of liability policy that goes into effect to cover you if the limits of your original homeowners or auto insurance policy are reached by an incident involving damages awarded by a court (i.e. if you’re sued). These flexible policies are relatively inexpensive and can prevent unexpected financial hardships.

Additionally, these policies generally extend to every member of your household — not just the policyholder. The incident also doesn’t need to happen specifically in your home or on your property for you to be covered.

How does it work? Let’s take a look at a real-world example.

How Does an Umbrella Insurance Policy Work?

Let’s say your homeowners insurance policy has a personal liability limit of $500,000. Not too bad. Now let’s say your teenager throws a party while you’re out of town. There’s drinking involved. Someone drinks too much, has a bad reaction, and ends up in the hospital.

That child’s family isn’t too pleased, and they decide to sue you for the medical bills. The jury goes along with it, finds that you were negligent, and awards the plaintiffs $1 million in medical and punitive damages.

Without umbrella insurance, you’ll pay the deductible — let’s say that’s $1,000 because you have a good policy — and your homeowners insurance policy covers another $499,000, up to the limit of the policy. What happens to the remaining $500,000? That’s on you. Adios college fund and the dream of retiring early.

If you have an umbrella policy — let’s say it’s for $1 million for the sake of round numbers — then you’ll still pay your deductible, but the policy will cover the remaining portion of the judgment that your homeowners insurance wouldn’t cover. The $1 million suit is handled for just $1,000. Johnny goes to college where he learns to be more responsible, and you retire comfortably on track.

This is a pretty specific example, and one you may never deal with. What if you don’t have kids? What if you do an excellent job limiting risk in your life? Do you still need umbrella insurance? We’ll get to that in a second, but let’s talk about what an umbrella policy will cover in broad terms.

What Will Umbrella Insurance Cover?

Your umbrella insurance policy will kick in when the liability limits of any policy you hold — homeowners insurance, auto insurance, motorcycle insurance, boat insurance, etc. — are reached. In the simplest terms, if you are sued for huge amounts of money, for whatever reason, and found to be liable, your umbrella policy will handle the difference between your deductible and liability limit and the remainder of the judgment.

In our society, where anyone can sue you for any reason, umbrella policies are becoming more popular — especially for people who have a lot of assets to protect.

Now that you understand what’s covered by umbrella insurance and how it works in the real world, let’s talk about what it won’t cover.

What Is Excluded From Umbrella Insurance Coverage?

There are a few things excluded from an umbrella insurance policy that need to be understood before you can decide whether you need one. These include:

• Damage to your property. Umbrella insurance is a liability policy, so it covers you only for damages you cause somewhere else. If you want more coverage for your own property and possessions, then you’ll need to adjust your policies.
• Damage a covered member causes on purpose. If Johnny decides to vandalize the school, neither your homeowners insurance nor your umbrella policy will cover the damages.
• Liability agreed to under a contract. If you signed something saying you understand the risks involved, then you’re waiving the ability to be covered by your policy.
• Liability through business activities. This won’t be covered by an umbrella policy, but you can purchase business liability insurance to cover this specific risk.

Got a good grasp of what umbrella insurance is for, what it covers, and what it won’t? Good. Now let’s talk about whether you need it.

Do I Need Umbrella Insurance?

Simply put, Umbrella insurance provides peace of mind. Most insurance companies recommend it because lawsuits happen with frightening frequency, and seven- or eight-figure settlements aren’t uncommon. Around 40 million lawsuits are filed in the U.S. every year2, and, although you never think it will happen to you, data shows it can.

The U.S. is one of the most litigious countries in the world, so folks certainly want to protect themselves3. The long and short of it is umbrella insurance is likely the best way to do that.

Do you need it? It’s probably about the same as your need for a safe to store your valuables. If your most expensive piece of jewelry cost $100, then purchasing a $1,000 safe to protect it may be overkill. If you have a collection that’s valued in the millions, though, that $1,000 safe looks a lot more reasonable.

One simple calculation some experts use to determine whether a person needs umbrella insurance is to add up the total value of all your assets — that means your checking and savings accounts, your retirement accounts, your investment accounts, and your home equity. If that figure is more than the limit of your homeowners or auto liability, you’ll want to consider umbrella insurance.

Another good thought exercise is to determine how at risk you are of being sued. We know no one can predict the future, but there are certain concrete risk factors. Some questions to consider are:

• Do you own property with tenants?
• Do you have teenagers who are just learning to drive?
• Do you rent out a vacation home on Airbnb?
• Do you have a large dog?
• Do you have a swimming pool in the backyard?
• Do you hire landscapers?

These are all risk factors you may want to consider in your ultimate determination of whether umbrella insurance is worth it. Another consideration, of course, is how much coverage will cost. Let’s take a look before we give you our final word.

How Much Does Umbrella Insurance Cost?

As you’ll find with any insurance policy, your umbrella insurance bill will depend on your coverage, where you live, and how much risk you present. It will also depend on the provider, so be sure to shop around.

Umbrella insurance is pretty inexpensive compared to other types of policies. Most million-dollar policies cost between $150 and $300 per year, per the Insurance Information Institute. That’s a lot of peace of mind for about $20 a month.

Now that we’ve taken a look at the costs, the coverages, and the utility of umbrella insurance, we’ll leave you with some parting thoughts.

Final Thoughts on Umbrella Insurance

Umbrella insurance is a great tool for adding additional peace of mind, especially when you consider how easy it is for folks to sue each other in our country. Do you need it? No. But if you value covering all your bases, it’s certainly a good idea to have it.

It’s an even better idea if your total assets significantly outpace the liability coverage offered by your home and auto policies. If something horrible happens and you wind up liable for damages, you’ll have to pay out of pocket to cover it. That could be financially devastating if you’re hit with a multimillion-dollar settlement, which, although rare, certainly do occur.

We may be biased since we write about insurance all the time, but, in our opinion, it’s always better to be safe than sorry.

Consider, however, that you may need to adjust the coverages of your homeowners insurance to purchase an umbrella policy. If you’re not happy with your provider, then now may be a good time to consider switching. If you find yourself in this camp, then do yourself a favor and check out our review of Lemonade. It’s one of the most innovative providers in the marketplace today. Or head over to our roundup of our favorite home insurance providers. There you’re certain to find what you’re looking for.

Umbrella Insurance FAQs