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Umbrella insurance provides excess liability coverage that goes above and beyond what your car and home insurance policies provide. It protects you and your assets if you face a large lawsuit.

Umbrella insurance is liability insurance that protects you and your assets from big-ticket lawsuit judgments.

An umbrella policy provides liability protection above your standard homeowner, auto, or boat insurance. It may also cover you for claims excluded by your other liability policies.

So, it’s good to have. But what is umbrella insurance and just how much umbrella coverage do you need?

In this guide, we’ll look at the factors that determine if you need this coverage and, if so, the amount you may want; explain in-depth what this insurance does, and provide details on what umbrella insurance costs.

How much umbrella insurance do I need?

Umbrella insurance policies are usually sold with a minimum of $1 million in coverage, although insurance companies offer these policies in increments up to $5 million and sometimes even $100 million.

Ben Schaum, an underwriting process manager for Progressive Insurance, says that a large majority of people who purchase umbrella insurance opt for $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 warns. "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 former senior product manager for MetLife Auto and Home Insurance, describes a scenario where 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.

In addition, Moore says 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.

How does an umbrella policy work?

Umbrella insurance covers expensive legal fees to defend yourself in a suit and the portion of a settlement or judgment that exceeds your home or auto insurance liability limits.

Without personal umbrella coverage, you would have to pay out-of-pocket for any costs beyond your home or auto insurance limit. If you can’t pay, you could have a lien placed on your home. Your wages could be garnished, and your savings, retirement investments, and other assets might be up for grabs.

Liability awards in legal settlements can be expensive. According to the Insurance Information Institute, 21% of personal injury liability awards and settlements hit the million-dollar mark or higher in 2019. That's where umbrella coverage can be critical.

Let’s take a look at a few things you should know about umbrella insurance in terms of a car accident:

  • You need to notify your insurance company as soon as possible to start the claims process.
  • Your auto insurance policy will cover you up to your coverage limits. You may still owe money depending on damages, injuries, and lawsuits.
  • You can file a claim with your umbrella insurance company if the total exceeds your auto policy liability limits.
  • Your umbrella insurance willcovereligible damages that exceed your auto insurance limits. To purchase an umbrella policy, your insurer will likely require that your auto liability insurance limits be above minimum levels and may even demand that you have $500,000 in liability coverage.
  • Your umbrella policy will cover the damages (and even your legal defense) up to your umbrella policy limit, which is often between $1 million and $5 million.

Do I need umbrella insurance?

The decision to purchase umbrella coverage depends upon two main questions:

  • What do you have to lose?
  • How much risk are you taking?

Use our auto insurance coverage calculator to see if you need personal umbrella insurance. Answer a few questions and get a recommendation of whether you should have umbrella insurance and in what amount. Also, you'll be given a recommendation for auto insurance coverage.

When deciding on umbrella insurance, you want to think about what’s at stake if you get sued. Consider these factors to calculate how much umbrella insurance you need.

Net worth

"Net worth" equals what you own minus what you owe.

So, your net worth is your assets (what you own) minus your liabilities (what you owe).

Basing your umbrella limit off of your net worth is the most common method.

For example, let’s say that your assets total $1,000,000, and your liabilities total $100,000. So, you’d have a net worth of $900,000. This information could help you decide to get umbrella coverage for up to $900,000.

Your personal umbrella policy’s amount should exceed your net worth. If your net worth is less than your current liability coverage, you may not need an umbrella policy.

Total assets

You can choose to set your umbrella limit based on your total assets. That gives you more protection than basing it on your net worth.

Some experts recommend coverage equal to the value of your assets without regard for your debts. This could help you avoid selling your home to pay a judgment if your net worth is your home equity.

If you apply this to the example above, you'd want at least $1,000,000 of liability insurance because the assets total $1,000,000. You may need an umbrella policy if your insurer's basic liability coverage limit is less than $1,000,000.

Future income

If someone sues you and gets a judgment that exceeds your liability coverage, your future earnings may also be on the line and could be garnished up to 25%.

To address this, consider multiplying your income by five and adding that amount to your asset total. If your total household earnings are $100,000 a year, and you have $500,000 in assets to protect, you may want a $1 million policy.

Collateral damage

Another facet of this examination is the potential damage to others.

If you've got two teens entering college, plan to retire soon, or are supporting aging relatives, a financial wipeout could be catastrophic and possibly permanent. That's another indication you might need to expand your liability insurance with an umbrella policy.

What type of coverage do umbrella policies provide?

An umbrella insurance policy can help you if you’re involved in a car accident with serious injuries and major property damage, injuries on your property, or if you get sued for libel or slander.

Here are five areas in which umbrella insurance can help:

  • Significant property damage. Your standard auto insurance liability limit may be exhausted if you’re at fault in an auto accident in which you destroy another vehicle and/or other property.
  • Serious bodily injury liability. Your homeowners insurance liability limit may be insufficient to cover medical and other costs related to a guest falling off a balcony at your home or being bitten by your dog.
  • Landlord liability. A tenant might file an expensive suit over an injury sustained while renting your property.
  • Libel or slander. Lawsuits could result from something that you say or write about another person.
  • Malicious prosecution. You may file a suit against someone and get sued for wrongfully or maliciously prosecuting that individual.

In each of the above examples, your home or auto liability coverage may protect you somewhat. Umbrella insurance provides another layer of protection once your standard liability coverage reaches its limit.

What’s not covered under an umbrella insurance policy?

Umbrella insurance covers you for liability. It doesn’t cover your injuries and personal belongings damage.

An umbrella policy may also not protect you from some types of property damage and injuries, depending on your policy. For instance, it may restrict coverage for injuries or damage while committing a crime or doing something deemed dangerous.

It could also not cover you if your dog bites someone and it’s considered a dangerous dog breed.

Read the fine print in an umbrella policy to see what coverage is excluded.

What is your risk of paying a lawsuit judgment?

When figuring out umbrella coverage, you'll need to review your lifestyle, assets, and what you have to lose.

Chubb, a top-rated insurance company catering to the high-income market, offers a checklist for determining your need for umbrella insurance.

Consider the following points:

  • Do you own a home? Even if it’s not a million-dollar property, it increases your liability.
  • Do you have a swimming pool on your property? Hot tubs, ponds, or trampolines are also a liability risk.
  • Do you drive a car regularly? Remember, it’s not about how much your car is worth but how much damage you could be responsible for if you’re at fault in an accident.
  • Do you have young drivers in your household or drivers that have a car away at school?
  • Do you employ a housekeeper, nanny, gardener, or other staff on the premises of your home?
  • Do you have a dog? Remember that any dog can bite.
  • Do you regularly entertain at your home?
  • Do you serve on the board of a non-profit that won’t be able to provide you with liability insurance if you’re sued?
  • Do you have a boat or other recreational vehicles?
  • Do you participate in social media? Social media participation is something most people take for granted, but verdicts for libeling companies or individuals online can lead to millions in damages.

What is the average cost of umbrella insurance?

So, how much is umbrella insurance?

Extended liability coverage is not that expensive. A $1 million policy costs about $240 a year (or $20 a month) according to Erie Insurance. This will vary by company and your personal risk factors.

However, if you're carrying the bare minimum auto and home liability insurance, you can't simply add a million dollars of umbrella coverage. Insurers won't let you buy umbrella coverage until you have a substantial amount of liability coverage on your auto and homeowners policies.

A company will likely mandate minimum liability coverage of $300,000 (or even $500,000) for homeowners and $250,000 per person/$500,000 per accident for bodily injury for auto before they let you add a personal umbrella policy.

The specifics of your situation will determine the cost of your policy. And unfortunately, costs are on the rise. According to a December 2020 study by brokerage Alera Group, umbrella insurance policy premiums are increasing across the industry.

Your current insurance company is a good place to start looking for umbrella protection. Getting a policy through your insurer will make it easier.

The key to finding the right umbrella coverage is to determine what limits are right for your risk tolerance. From there, shopping around for rates can help you save.

How to buy umbrella insurance

You can buy umbrella insurance with almost any major insurance company. In some cases, you will need to have your home or auto insurance policy with the insurance company before they write you an umbrella policy.

To buy umbrella insurance coverage, first, consider how much extra liability coverage you need and then speak with your insurance agent about adding it.

Start shopping around if your current insurer does not offer enough coverage to meet your needs. Some insurance companies will sell umbrella insurance coverage as standalone, like Auto-Owners. But unless you go with a company that permits these as standalone policies, you'll want to get your home and auto quoted along with the umbrella policy.

How to save on umbrella insurance

Adding umbrella liability insurance will increase your insurance bill. However, there are ways to limit the expense.

  • Raise your home and auto deductibles. Choosing a higher deductible means you save on premiums, which can go toward paying for your umbrella coverage.
  • Compare insurance quotes.Compare the whole package when you get insurance quotes (you might find savings on your basic policies as well).
  • Bundle your insurance. You can save hundreds of dollars if you bundle home and auto insurance, including your umbrella policy.
  • Ask about discounts. In addition to bunded discounts, insurers often offer discounts for drivers over 50, safe drivers, and people with good credit.

Keep in mind that some insurers may give you a better rate on your basic liability policies if you add umbrella insurance. It pays to shop the entire package. However, the biggest expense involving umbrella coverage may be the cost of failing to protect yourself with this relatively inexpensive insurance.

Pros and cons of umbrella insurance

Umbrella insurance can save your finances and home, but not everyone needs it. For instance, people who don’t own homes likely don’t need an umbrella policy.

Let’s take a look at the pros and cons of umbrella insurance.

Pros

  • You can get a lot of liability coverage for a relatively low annual premium.
  • Protects your finances and home if you get sued, including libel and slander suits.
  • You may be able to bundle umbrella insurance with a home and auto policy and get cheaper rates.

Cons

  • Umbrella insurance doesn’t cover everything and doesn’t kick in until underlying limits are met.
  • You can’t buy umbrella insurance unless you buy the highest available amount of home and auto liability protection.
  • You may have to buy umbrella insurance through the same insurer as your home and auto.

Frequently asked questions

Does an umbrella insurance policy cover dog bites?

Some home insurance companies do not cover dog bites. Those that do will put your claim through your homeowners policy first. If the dog bite damages exceed your standard policy coverage limits, your umbrella policy will kick in.

What is the difference between umbrella and excess insurance?

Is umbrella the same as an excess insurance policy? Not quite. An umbrella policy provides additional coverage over the underlying liability limits. Typically, these policies can include coverage against events not included in the underlying policy. But excess insurance provides more coverage for specific events. With more limitations, excess liability insurance protects against specific situations.

What are the best umbrella insurance companies?

Most major insurers offer umbrella insurance coverage. We spend a lot of time researching the best auto insurance and home insurance companies so you don't have to.

Ask your current provider about umbrella options or shop around with some of the best insurance companies to see what they can offer. Companies like Travelers, Liberty Mutual, and Chubb are known for high umbrella coverage limits. What defines best is different for different people, depending on their needs.

What is standalone umbrella insurance?

Standalone umbrella insurance refers to companies like Auto-Owners and RLI that will sell umbrella policies without requiring home or auto policies to be written with them.

What is drop-down coverage on an umbrella insurance policy?

Drop-down coverage indicates that an umbrella policy will step in to cover relevant expenses when the original liability policy reaches its maximum.

How much does a $5 million umbrella policy cost?

Based on a rate of $240 (from Erie insurance) for $1 million, you can expect to pay anywhere from $50 to $100 for each additional million, giving a range of $320-$640 for a $5 million umbrella policy.

Can I buy umbrella insurance separately?

Yes, it’s possible to buy umbrella insurance separately. But you’ll need underlying homeowners and auto insurance with substantial coverage limits.

Does umbrella insurance cover lawsuits?

Yes, in some situations, umbrella insurance covers lawsuits. Before committing to a particular policy, determine what types of lawsuits are covered by reading the fine print.

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