Umbrella insurance is a type of personal liability insurance that protects you in the event there’s a claim or lawsuit against you and you’re required to pay a large amount of money. As the term “umbrella” implies, it covers you beyond the limits of your other insurance, such as your homeowners or auto insurance.
Many financial planners consider umbrella insurance an essential, particularly for those people who have accumulated even a modest amount of wealth and want to ensure its protected. And given that you can purchase $1 million worth of umbrella insurance for under $300, it might also give you some peace of mind in an era where lawsuits with huge settlements are becoming more common.
What does umbrella insurance cover?
While policies vary and you’ll need to review the exact details of any coverage you’re considering, umbrella insurance can cover the following:
- Property damage
- Bodily injury
- Personal injury
- Landlord liability
- Reputation injury (slander, libel, and defamation)
- Court costs
Make sure you understand what your policy does and does not cover. For example, umbrella policies typically do not cover business losses, personal belongings, and intentional or criminal acts.
An example of how umbrella insurance works
Say you’re in a car accident and you’re at fault. The other driver is hospitalized and sustains significant injuries. Your car insurance covers the other driver up to your policy’s limitations, which in this hypothetical case is $250,000.
But that $250,000 is not enough to cover the other driver’s medical bills. Plus, because of his injuries, the other driver will require expensive rehabilitation, additional surgeries, and will be unable to return to work for a full year. You’re now being sued for $1 million to cover the other driver’s medical bills, rehabilitation costs, additional surgery, and loss of income.
While your auto policy pays $250,000, if the other driver wins the lawsuit, you could be ordered to pay the remaining $750,000. This could place your personal wealth at risk, meaning anything you have of value such as your bank accounts, home, retirement savings, and other personal property. However, depending on your policy limits, an umbrella policy could provide the additional coverage you need to avoid having to deplete your life savings to pay off the judgment against you.
Who typically buys umbrella insurance?
If you already have sizable assets or are beginning to accumulate assets that you’d like to protect in the event of a lawsuit or claim against you, then an umbrella insurance policy might be a good idea. While there are no hard and fast rules regarding when you should buy an umbrella policy, if you have $500,000 or more in assets, you should certainly consider looking into one. Be sure to consider the value of all your assets, such as retirement accounts, home equity, brokerage accounts, and the expected value of your future earnings.
Additionally, if you engage in activities that put you at risk for being sued (such as being a landlord), then you might also benefit from the additional protection of an umbrella policy.
Take a look at all the other things and activities in your life that could put you at risk for a lawsuit. Examples of this include owning vacant land that someone might get injured on (even if they wander in uninvited) or hosting parties at your home where someone might slip and fall. Daily activities that seem innocuous at the time could put you at financial risk if things go awry.
What does umbrella insurance cost?
The price varies depending on the coverage offered. Most companies offer policies ranging from $1 million to $5 million in coverage. According to the Insurance Information Institute, you should expect to pay around $150 to $300 a year for a $1 million personal liability umbrella policy.
The Bottom Line
Accidents happen all the time. If you decide you’d like the additional protection umbrella insurance offers, be sure to do your homework and research several insurance companies before deciding.
A good place to start is with your state’s department of insurance. In the United States, each state has their own insurance department that regulates insurance companies and agents in order to protect consumers. On your state’s insurance department site, you might find information about a company’s complaint data, premium comparison tools, and consumer education.