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We do what we can to avoid them, but accidents happen. And in a society where lawsuits are common and very costly, your financial security — everything you’ve worked so hard for — could be wiped away should you be sued and found liable without having the proper protection.
A severe car accident or injury on your property could trigger a costly claim in excess of the liability coverage you currently have on your auto or home, forcing you to reach into your own pocket to cover the difference.
Unless you have umbrella insurance.
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What Is Umbrella Insurance?
Umbrella insurance is additional liability coverage. You can think of umbrella insurance as an additional layer of security that picks up where the coverage of your other insurance policies ends, such as homeowners or auto policies.
Want an example of how umbrella insurance could come in handy? Imagine this.
It’s your turn to drive a group of five or six children to their early morning soccer match, so they all pile into your SUV. Maybe one of the other parents hops into the front seat, as well.
The roads are slick, and you’re strapped for time, so you’re going a little too fast. Suddenly, you hydroplane into oncoming traffic, and your SUV slams into two cars, resulting in $90,000 in vehicle damages.
Fortunately, nobody dies, but you injure eight people and the medical bills come out to $650,000. The parent in the front seat of your SUV suggested that you slow down seconds before the accident occurred, and they decide to bring a lawsuit against you for negligence and lost wages, suing you for $410,000.
In just a few seconds, that accident costs you $1,150,000 in damages and injuries. You have $500,000 in liability coverage on your auto insurance, but you’re still on the hook for the remaining $650,000.
Without umbrella insurance, your only options might be to clear out your retirement fund, take on a massive amount of debt, or make payments at the cost of future wages. An umbrella insurance policy, on the other hand, will cover the remaining $650,000 your auto insurance didn’t cover and all the court fees associated with the lawsuit.
What Does Umbrella Insurance Cover?
Umbrella insurance provides extra coverage for expensive claims and lawsuits. Keep in mind, however, that it won’t kick in until all other applicable policies have been exhausted.
| What Umbrella Insurance Typically Covers | What Umbrella Insurance Typically Doesn’t Cover |
| Bodily injury | Injuries to you |
| Property damages | Damage to your personal property |
| Landlord Liability | Intentional or Criminal acts |
| Certain Lawsuits | Business liability |
| Legal Fees/Court Costs | Injuries to contracted workers |
Umbrella Insurance Coverage Broken Down
Bodily Injury
Umbrella insurance will cover the costs of medical treatment, funerals, or lawsuits for others’ injuries associated with the accident that exceed the limits of your auto or homeowners insurance.
Want some examples? Check out the following:
Your Teen Causes a Car Accident
After borrowing your family car for the day, your teen causes a car accident that severely injures a top executive for a big tech company. The medical costs and lost wages exceed the limit of your auto policy. Umbrella insurance will cover the remainder.
Your Injured Guest Needs Ongoing Medical Treatment
A guest is over at your house and trips on a toy your child left on the stairs. They fall and break a bone, which leaves them out of work for several months. Umbrella insurance will pick up where your homeowners insurance ends.
Your Dog Bites Someone While on a Walk
You take your dog for a walk around the neighborhood. Your neighbor’s child runs up to pet your dog, and your dog bites them. Depending on the company, your homeowners insurance may not cover this damage, but umbrella insurance will.
Property Damages
If someone’s property is damaged in an incident you’re found liable for, umbrella insurance can help cover the costs other insurance policies may not cover.
Need help visualizing it? Imagine these scenarios:
You Sink a Rental Boat
You’re enjoying your vacation and it’s time to rent the boat you reserved. As you go to dock to return it, you strike the pier and cause significant damage to the boat and pier. Everyone is ok, but the boat takes in water and sinks.
You Flood Your Neighbor’s Apartment
You run a bath and leave the room to do something while it fills. You get caught up and forget that you left the faucet on and it floods, causing water damage to your downstairs neighbor’s home that exceeds the limit of your renters insurance.
Landlord Liability
Landlords often deal with many different types of insurance policies, but one of the most important for a rental property is umbrella insurance. Not sure if umbrella insurance is right for you?
Consider a situation like these:
An Uneven Sidewalk Causes a Fall
A tenant has some friends over to visit. As they’re walking up the sidewalk, one of the guests trips on an uneven section of the sidewalk and falls. They injure themselves and sue you.
Your Empty Lot Hosts a Football Game
You have vacant land that some kids stumble upon and deem a perfect place for a football game. Two of the children are injured after falling into a metal rod that was left laying on the ground. The parents sue you for damages.
Certain Lawsuits
Lawsuits aren’t only brought on by injuries resulting from things like car accidents or falls on your property. Umbrella insurance will also cover you if you’re sued for:
- Libel (something you write that injures someone’s reputation)
- Slander (something you say that damages someone’s reputation)
- False arrest, detention, or imprisonment
- Malicious prosecution
- Mental anguish or shock
Legal Fees/Court Costs
Yup, you read that correctly. Umbrella insurance will even help cover any court costs or lawyer fees brought on by having to defend yourself in a lawsuit.
How Much Does Umbrella Insurance Cost?
For the protection you get, the price of umbrella insurance is dirt cheap.
According to the Insurance Information Institute, an umbrella policy with $1 million in coverage costs between $150 to $300 per year.
The price you pay per million drops after the first, with the second million costing about $75 per year, and $50 per year for every million after that.
Of course, this may vary depending on the amount of coverage you need and the insurance company you go with, so talk to your insurance agent for an accurate quote for your circumstances.
Here’s a list of insurance companies that offer umbrella insurance:
Do I Need Umbrella Insurance?
The individuals who purchase umbrella insurance varies, though it’s often purchased by those who:
- Have significant savings or other assets
- Want to protect the potential loss of future income
- Coach youth sports
- Ski, surf, or hunt
- Own a swimming pool, trampoline, or other things that can lead to lawsuits
- Own property
- Own certain breeds of dogs
The fact of the matter, however, is that anyone can benefit from the coverage.
“It’s not just for rich people,” says Howard Sorkin, a CFP professional in Skokie, Illinois and adjunct instructor for the Certified Financial Planning Program at DePaul University in Chicago, Illinois. “It actually protects the average person,” Howard says.
Sure, having a large number of assets may make you a target for someone to go after in the event you’re hit with a lawsuit, but being in a financial situation where you have nothing to go after at the moment could be just as devastating. If you’re forced to pay a judgement, you could find yourself stuck paying a massive amount of debt or even have your future wages garnished until you pay off the settlement.
You can think of umbrella insurance as an additional layer of security that picks up where the coverage of your other insurance policies ends.
You may think you’ll never need it. Hopefully you won’t.
But a valid argument can be made that everyone can benefit from personal umbrella insurance.
How Much Umbrella Insurance Do I Need?
The amount of umbrella coverage you need depends on your personal financial situation and the risks you’re able to handle on your own.
For some people, the amount is in line with their assets plus their income. For others, it may be dependent on their potential exposure to risk. Generally speaking, the more exposure to risk, the higher the liability limit.
If basing it off your assets and income, you can determine how much umbrella insurance you need by following these steps:
- Calculate Your Net Worth: Add up the value of all your assets — your house, vehicles, bank accounts, stocks, bonds, retirement funds, estimated future salary, etc. — and subtract your debt.
- Determine Existing Liability Coverage: Look at your auto, boat, or homeowners policy and find the limit of your liability coverage.
- Compare Your Net Worth to Your Liability Coverage Limit: If the value of your net worth exceeds the smallest number you found in step two, you may want to consider an umbrella policy. The difference in the two amounts is what you have that’s unprotected.
Umbrella insurance policies typically offer at least $1 million in liability coverage and are usually available in increments of $1 million, up to $5 million, though some companies may offer higher coverage.
Make sure to go over everything the policy covers, and pay special attention to any types of activities that may be excluded from umbrella coverage.
Author:
Matt specializes in financial news, budget travel, banking, and debt. His interest in personal finance took off after eliminating $30,000 in debt in just over a year, and his goal is to help others learn how to get ahead with better money management strategies. A lover of history, Matt hopes to use his passion for storytelling to shine a new light on how people think about money. His work has also been featured on FinanceBuzz and Recruiter.com.
