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What is umbrella insurance & How much do you need?

By Posted : July 7, 2020

Umbrella Insurance

Umbrella insurance is liability insurance that protects you and your assets from big-ticket lawsuit judgments. You can think of an umbrella policy as excess liability coverage.

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

Let’s take a look at personal umbrella insurance, how much coverage you need and how much it costs.

What is covered under an umbrella insurance policy?

How does an umbrella policy work?

Who needs umbrella insurance?

What is your risk for paying a lawsuit judgment?

What’s not covered under an umbrella insurance policy?

How much should you buy?

What does umbrella insurance cost?

Pros and cons of umbrella insurance

How to save on umbrella insurance

What is covered under an umbrella insurance policy?

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 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.

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 Jury Verdict Research, 13% of personal injury liability awards and settlements hit the million-dollar mark or higher. That's where umbrella coverage can be critical.

The process of filing an umbrella policy claim may differ depending on the type of claim. Let’s take a look at how the process works if you’re involved in a car accident:

  • Notify your insurance company as soon as possible so that it can start the claims process.
  • Your auto insurance policy will cover you up to your coverage limits.
  • Despite your auto insurance policy covering you up to your policy’s limits, you may still owe money depending on damages or injuries and lawsuit. If the total exceeds your auto policy, you’ll file a claim with your umbrella insurance company.  
  • Umbrella insurance covers eligible damages that exceed your auto insurance limits. Note that 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 are often between $1 million and $5 million.

Who needs umbrella insurance?

The decision to purchase umbrella coverage depends upon two major 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 when determining your umbrella insurance needs:

Net Worth

"Net worth" equals what you own minus what you owe -- assets minus liabilities.

Net worth = Assets (what you own) - Liabilities (what you owe)

Basing your umbrella limit off of your net worth is the most common method. See the example of calculating net worth below. 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.

net worth calculation

Total Assets

Set your umbrella limit based on your total assets. That gives you more protection than basing it on your net worth.

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 $500,000 of liability insurance because the assets total $500,000. You may need an umbrella policy if your insurer's basic liability coverage limit is less than $500,000.

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 is your risk for paying a lawsuit judgment?

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

ACE Private Risk Services created a 22-part Personal Liability Risk Scorecard designed to assess your possible need for umbrella coverage. Some factors considered may surprise you.

risk factors for umbrella insurance

Consider the following points:

  • Do you own vacant land? Can the public access it? Someone who gets hurt on your property, even if uninvited, could sue you for damages. It's even riskier if you lease it out for hunting.
  • How many swimming pools, hot tubs, ponds and/or trampolines do you own? These are likely sources of injury and lawsuits.
  • Do you have a home office or business that receives regular customer/client visits?
  • Is your property getting a major renovation? Construction increases the risk of injury; even if you purchase home construction insurance, an umbrella policy can protect you when you reach the limit of that coverage.
  • The number of automobiles owned, types of cars and the number of drivers, especially those under 26, all impact your exposure.
  • Does anyone in your home serve on a charitable board? Those who serve on corporate boards of directors are usually protected from personal liability, but people working for charities or non-profits often don't get the same protection.
  • Do you own rental properties? The more tenants you have, the higher your lawsuit risk.
  • Small recreational and transportation vehicles, such as ATVs, golf carts, personal watercraft and boats, can lead to liability claims.
  • Social media participation is something most people take for granted, but verdicts for trashing companies or individuals online can lead to millions in damages.
  • Do any household members have a prominent public profile? This is also known as the "Google test." Prominent people tend to attract more lawsuits because people assume they have something to lose.
  • How many home-hosted parties with 25 or more guests do you have each year? Big parties increase opportunities for injury. In fact, you may be required to get an umbrella policy before you're allowed to reserve a local community facility, such as a group picnic area, clubhouse or park, for a larger party.

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 for 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.

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 $10 million.

Ben Schaum, a product 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 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.

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.

What does umbrella insurance cost?

Excess liability coverage is not that expensive. A $1 million policy runs between $150 and $300 per year, according to the Insurance Information Institute.

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'll let you add a personal umbrella policy.

Here's an estimate of umbrella insurance cost:

  • $1 million policy -- $150-$300
  • $2 million policy -- $225-$375
  • $3 million policy -- $275-$425
  • $4 million policy -- $325-$475
  • $5 million policy -- $375-$525

Penny Gusner, senior consumer analyst for insurance.com, suggests people ask their current insurer about umbrella protection. Getting a policy through your insurer will make it easier.

Also, some insurers require that you have auto and home with them before giving you an umbrella policy. Going with the same insurer could also lead to discounts. Talk to your insurer or broker and discuss your assets and risks. For instance, having a teen driver on your policy increases your risk.

“Umbrella policies all cover the same basic items, so it really is then about determining the limits you feel are best for your situation and then shop around for rates,” Gusner says.

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

  • There isn’t a huge premium difference between a million-dollar policy and ones with more protection.
  • 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 likely isn’t needed for people who don’t own a home or whose home and auto provides enough coverage to protect a person’s finances.
  • You can’t buy umbrella insurance unless you buy the full amount of home and auto liability protection.
  • You may have to buy umbrella insurance through the same insurer as your home and/or auto.

How to save on umbrella insurance

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

  • Raise your home and/or auto deductible: Choosing a higher deductible means you save on premiums, which can go toward paying for your umbrella coverage. You'll want to make sure you have enough money to pay your deductible if you ever need to file a claim.
  • 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.