An umbrella insurance policy provides additional coverage outside the existing limits of other policies, like car insurance and home insurance. If you get sued after a car accident or that "friend of a friend" slips and falls at your pool party, the liability coverage including in your home or car insurance will cover the legal fees and any money the court orders you to pay to the injured party.
But standard insurance policies typically have coverage limits of around $250,000 to $300,000. In a lawsuit where the fees and damages you have to pay exceed that limit, you'd be on the hook for everything above that coverage limit.
Standard policies also might have limits to when and where they'll cover you. If you're sued for libel or get into a car accident abroad, for example, the liability coverage included in your home or car insurance might not cover you.
Umbrella insurance kicks in when the underlying liability limit of an insurance policy is reached. Whether or not you need this supplemental coverage depends mainly on your net worth and how at risk you are of being sued (though, you may be more at risk than you think). Here's what you need to know about umbrella insurance and how to determine how much you need.
How much does umbrella insurance cost?
Umbrella insurance is usually sold in increments of $1 million, up to $5 million. To buy it, you'll need to already have a minimum level of home and auto liability coverage, typically $250,000 for auto insurance and $300,000 for homeowners insurance.
The cost of umbrella insurance can range anywhere from $200 per year on the low end to over $1,000, according to Trusted Choice, with an average cost of about $380 per year to get $1 to $2 million of protection. However, how much you'll pay for umbrella insurance depends on several factors, like where you live, how much coverage you buy and your risk profile.
To determine how much your umbrella policy will cost, Trusted Choice advises individuals to assess their net worth, review their risk of becoming the target of a lawsuit and choose an appropriate amount of coverage, which "should be at least equal to your net worth."
You can also use this calculator to assess how much umbrella insurance coverage you need.
What does umbrella insurance cover?
Most umbrella insurance policies offer coverage for the following:
- Bodily injury: Umbrella insurance can help cover the cost of medical bills and/or liability claims for injuries to another person, whether it's from an at-fault auto accident or an accident in your home (guest falling, dog bite, etc.).
- Property damage: Umbrella insurance can help cover loss or damage you cause to another's property if the damage exceeds your underlying policy limits.
- Lawsuits: If you are involved in a lawsuit for slander, libel, defamation of character and/or other personal attacks, umbrella insurance can provide coverage for legal expenses.
- Landlord liability: If you own a rental unit, umbrella insurance can help cover liability claims you may experience as a landlord, such as if a tenant trips on the property, gets injured and sues. If your landlord policy reaches its limit, umbrella insurance can provide additional coverage.
How to buy umbrella insurance
If you buy your home and auto insurance from the same insurer, you'll typically get a discount of 10% to 15% on your annual premiums, and you may get an additional discount on the umbrella policy as well. You can offset at least some of the umbrella premium by taking larger deductibles on your auto and home insurance policies.
With a single insurer, your coverage is less likely to fall through the cracks if the requirements for the umbrella policy change. And if you're sued, you'll have one set of defense lawyers for the entire case. Otherwise, agents advise you to buy the umbrella policy from your auto insurer because most large lawsuits involve auto accidents.
If your current home or auto insurer won’t sell you an umbrella policy — because your dog's breed is classified as potentially dangerous, for example — ask an independent agent who represents multiple insurers to help you find a stand-alone umbrella policy.
Do I need umbrella insurance?
One quick way to tell if you need umbrella insurance is to calculate your net worth. If the total value of your savings, investments, home equity and other assets is higher than the maximum amount of liability coverage your home or car insurance will offer, you want to look into supplementing that with additional liability coverage.
Progressive advises individuals whose net worth exceeds their maximum liability coverage via their standard insurance policies to open an umbrella policy in order to avoid any negative financial repercussions.
You might also want to look into umbrella insurance if you're at higher risk of being sued. Never thought of yourself as a target for a lawsuit? You might be surprised at the activities and lifestyle factors that can put you at higher risk of being sued.
According to the Insurance Information Institute (III), those risk factors include things like:
- Owning a swimming pool and having pool parties
- Renting out a property you own
- Having a dog or a teenage driver in the house
You should also consider opening an umbrella policy if you:
- Are a landlord
- Own property
- Have significant savings or other assets
- Want protection for liability claims against you when traveling outside the U.S.
- Coach kids’ sports
- Often host parties in your home
- Take part in sports where you could easily injure others — hunting, skiing or surfing
- Are a public figure
- Own watercraft or recreational vehicles
Choosing the right umbrella insurance coverage
Umbrella insurance can help protect your assets if claims exceed your insurance policy limits. This extra coverage can give you peace of mind and often makes sense if your income exceeds your liability coverage, or if you have high-risk situations, like you own a dog or a swimming pool.
You can buy a liability insurance policy through your home insurer or an independent agent, and you can choose the amount of coverage you want. Purchasing an umbrella insurance policy can be a helpful way to ensure you’re fully protected in case the unexpected happens.
