How much umbrella insurance should you have?

By Posted : 12/29/2010

Umbrella insurance may not have much to do with summer thundershowers, but it can protect you from an insurance liability storm.

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This type of insurance typically provides additional liability coverage - usually $1 million and beyond - on top of the liability coverage you already receive through your auto and homeowners insurance policies.

"Not everyone needs umbrella insurance, but more people need it than have it," says Ben Schaum, a product manager for Progressive Insurance.

Umbrella insurance can protect you if you are sued for expensive mishaps such as the following:

  • You cause a multi-car accident that leaves other drivers and passengers injured and unable to work.
  • Someone sneaks over your fence in the middle of the night and drowns in your backyard pool
  • You serve on a nonprofit board and you participate in a decision that negatively impacts someone who decides to sue the board members.
  • A passerby slips on your icy sidewalk that you have neglected to shovel or treat with an ice-melting product, resulting in severe injury and a lifelong disability.

Joann Kraemer, director of product management for MetLife Auto and Home Insurance, says people generally should not overlook umbrella insurance unless they have no assets or are willing to risk losing the assets they have.

"Anyone who owns a home and has a retirement plan should consider buying umbrella insurance to protect those assets in case of an accident or lawsuit," says Kraemer.

Deciding how much umbrella insurance to buy

The typical minimum amount of coverage for umbrella insurance policies is $1 million, although insurance companies offer these policies in increments up to $5 million and sometimes even $10 million.

Schaum says that a large majority of people who purchase umbrella insurance opt for $1 million in coverage. He adds that it typically costs about $200 per year for that $1 million in coverage.

"The important thing to realize is that you don't need $1 million in assets to need that much coverage," Schaum says. "The amount of coverage depends more on your personal comfort level and where you are in life."

While $1 million may seem like a lot of coverage, liability totals can add up fast.

For example, Ronald Moore, a senior product manager for MetLife Auto and Home Insurance, describes a scenario in which a balcony collapses at a dinner party, severely injuring several people.

"If those people have to miss work for six months or more while recovering, and each makes $150,000 per year, the standard home insurance liability coverage of $100,000 won't cover the replacement of $300,000 or more in lost income along with the medical bills for the injuries," says Moore.

Moore says that in a case when two people crash into each other on jet skis, the medical costs for even relatively minor injuries can easily exceed $60,000 per person.

"If someone is severely injured, the immediate medical costs and projected future costs of medical care and perhaps remodeling a home to accommodate the person's injuries could quickly exceed $1 million," says Moore.

Who needs umbrella insurance?

According Moore, you should review you lifestyle in addition to your assets when deciding whether you need umbrella insurance.

"You may not think you live a risky life if you mostly just drive to work every day, you own a home and are on the board of a local school or nonprofit group like the Boys and Girls Club," says Moore. "But you could still have a catastrophic car accident or someone could have an accident in your home."

In a lawsuit, a plaintiff can go after not only the savings (including, in some cases, retirement funds) of someone who causes an injury, but can also garnish future wages. In some states, the equity in someone's home can also be part of the judgment, forcing a sale.

Umbrella insurance coverage that includes international coverage is particularly valuable for people who travel widely, since most auto insurance does not cover an overseas accident. The policy also covers vacation rentals of boats and jet skis and other types of rentals.

In addition, you can use an umbrella policy to defend yourself in slander or defamation of character lawsuits if the policy includes personal injury coverage.

Schaum says many customers choose to buy umbrella insurance if they have a swimming pool or a trampoline at their home.

Umbrella policies and auto insurance

Kraemer says umbrella insurance is valuable in cases such as a multi-car accident, since the liability coverage on most auto insurance policies is limited to a maximum of $500,000.

"Insurance money can go fast on medical expenses and physical therapy for injuries and for the cost of repairing or replacing several vehicles," says Kraemer.

In addition, a driver at fault sometimes has to pay for job retraining if the injured driver is permanently disabled. Drivers responsible for accident also may have to pay for loss of income and pain and suffering of the injured driver, Kraemer says.

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