Umbrella insurance: Pros, cons and who should buy it

Pros and cons of an umbrella insurance policy

Umbrella insurance offers liability protection starting at $1 million at a relatively low cost, but it requires higher underlying policy limits and does not cover every type of loss.

Pros

• Umbrella insurance provides liability coverage starting at $1 million, at a cost that is low relative to the amount of coverage.
• An umbrella policy helps to protect your assets, including your home, if you’re found to be liable or negligent for injuries or damage.
• Umbrella insurance starts where your home or auto coverage leaves off, meaning it’s an additional limit on top of that limit, creating a much larger pool of resources in a lawsuit or claim.
• Umbrella insurance covers liability types excluded from home and auto policies, including libel, slander, malicious prosecution and false arrest.

Umbrella insurance supplements rather than replaces existing liability coverage, activating only after your home or auto policy limits are exhausted. As Patrick A. Cozza, executive in residence at Silberman College of Business, Fairleigh Dickinson University, notes, umbrella insurance is low-cost relative to the amount of coverage it provides.

"The benefits of umbrella insurance are to offer additional liability protection beyond what you might have under your auto and/or homeowners policies. Umbrella insurance is a relatively low-cost insurance, relative to the amount of coverage," Cozza said.

Cons

• Umbrella insurance doesn’t cover everything; it doesn’t cover personal property, your injuries, written or oral contracts, war or terrorism or business losses, for example.
• Most umbrella insurers require you to carry the highest available liability limits on your home and auto policies before you can purchase an umbrella policy, which increases your total insurance cost.
• You may have to buy umbrella insurance through the same insurer as your home and auto; if your current company doesn’t offer it, that might mean switching.

Do you need an umbrella insurance policy?

You need umbrella insurance when your net worth exceeds the maximum liability limits available on your home and auto policies. If a judgment against you could exceed those limits, umbrella insurance protects the difference, covering your assets and future income.

Liability claims can exceed home and auto policy limits, leaving the policyholder personally responsible for court costs and judgments. This risk applies regardless of net worth, since future income can also be subject to a judgment.

To determine whether umbrella insurance is right for you, compare your total net worth and future income against your current home and auto liability limits. Get quotes from multiple insurers, as umbrella premiums and underlying limit requirements can vary by company.

"Like most insurance, it's best to shop around for the lowest premium," Cozza said.

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Auto-insurance insurance Q&A :

Q : Is it cheaper to buy a personal umbrella policy than to increase my auto and home insurance liability limits?

A : It might be cheaper, but it also might not give you the coverage you need. First, it's important to note that many umbrella insurance companies will require that you increase your underlying auto and home limits to the maximum available before you can buy umbrella insurance. So you may have to pay more either way. Second, umbrella insurance offers much higher limits that are available on home and auto insurance. To get the amount of coverage you need, umbrella insurance may be the only option. Finally, home and auto insurance limits can't be combined; if a claim against your home insurance exceeds your limits, you can't use your auto insurance liability coverage to cover the excess; only umbrella insurance can do that. So, while it may be cheaper to simply increase your auto and home insurance limits, it doesn't provide the same level of coverage.

Answered by Leslie Kasperowicz, Executive Editor

Q : How can umbrella insurance help protect me?

A : Umbrella insurance provides a much higher level of liability protection than either home or auto insurance against lawsuits. It will protect your assets in the event of a major claim against you and protect you from more situations than any other policy.

Answered by Leslie Kasperowicz, Executive Editor

Q : At what level of net worth does buying umbrella insurance make sense?

A : In general, you should consider umbrella insurance if your net worth exceeds the underlying limits on your home and auto policies. It's also important to consider not just current net worth but future income, which can be impacted by a judgment against you. If you're not sure, speak with a financial advisor.

Answered by Leslie Kasperowicz, Executive Editor

Q : Is it a good idea for the average person to buy umbrella insurance?

A : It's never a bad idea to have umbrella insurance, but it is an added cost so it's worth exploring your needs. Whether or not you need umbrella insurance depends on a lot of personal factors. There's really no average person when it comes to buying umbrella insurance. Your assets, risk level and tolerance for risk all come into play, so it's important to sit down with a financial advisor to examine your situation and decide if umbrella insurance is right for you.

Answered by Leslie Kasperowicz, Executive Editor

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