Liability insurance protects you and your family’s finances when you’re responsible for property damage or injuries to other people, such as a lawsuit against you over a large car accident. But what if these costs exceed the liability coverage in your auto or homeowners insurance policy? That’s when you need umbrella insurance.
What Is Umbrella Insurance?
Umbrella insurance is additional liability insurance that pays beyond the limits of your other insurance policies. These can include your auto, homeowners and/or watercraft insurance policies. It’s for expensive situations where medical bills and/or repairs exceed your “base” auto, homeowners or boat insurance policies.
– Penny Gusner, senior insurance writer for Forbes Advisor
You can think of it as asset protection because it can prevent you from losing your assets in order to pay for a lawsuit judgment against you.
You typically need to have a minimum level of home and auto liability insurance to buy umbrella insurance. For example, you might need to have at least $300,000 in your homeowners insurance policy and $250,000 for injuries and $100,000 for property damage in your auto insurance policy.
How Does Umbrella Insurance Work?
Umbrella insurance kicks in when you reach your “base” liability limits for a policy, such as home insurance and car insurance.
Here’s an example.
| Cost of Injuries to Others in an At-Fault Accident | $200,000 |
| Your Bodily Injury Liability Limit | $30,000 |
| Umbrella Insurance Payout | $170,000 |
Incidents Where Umbrella Insurance Could Cover You
You cause a serious auto or boating accident
Auto or boating accident bills can mount up quickly, especially if you’re liable for the medical bills of multiple people. Your auto or boat insurance policy would pay first, up to its maximum, followed by your umbrella insurance.
Your dog bites someone
Dog bites are typically covered by a homeowners insurance policy’s personal liability coverage. But if you’re sued for an amount above your home insurance liability limit (such as medical bills and pain and suffering), your umbrella policy would start paying.
You drive your car into a building
It happens—someone is parked close to a convenience store and they put the car in drive rather than reverse, causing extensive building damage. Your auto insurance policy would pay first, followed by an umbrella policy if your auto insurance limit isn’t enough.
You accidentally injure someone
If you or a family member accidentally injures someone, umbrella insurance will pay when auto or home insurance is exhausted. For example, say your son accidentally throws a baseball into someone’s face, causing extensive injury. Your homeowners liability insurance will pay first, followed by umbrella insurance.
You’re on a board of directors of a charity and are sued for a board-related issue
An umbrella policy may provide coverage for lawsuits against you related to your work on a board of directors. Umbrella coverage may depend on whether the board is a non-profit and whether you’re paid for your service. It’s best to consult your insurance agent to understand whether you’ll be covered.
Your teen is sued
Let’s say your teen posts a libelous comment online and you are sued. Your umbrella insurance can pay for legal costs and judgments.
Your child accidentally causes damage to someone else’s property
If your child accidentally damages someone else’s property, your home insurance can pay out first, followed by umbrella insurance if the damage exceeds your home insurance liability limits.
Is Umbrella Insurance a Waste of Money or Worth It?
If you have significant assets, it’s worth getting an umbrella policy. The liability insurance within your auto and homeowners insurance policies might not be sufficient if you get sued for an incident such as dog bite, car accident or accidental injury to someone else.
Ultimately, umbrella insurance protects you from losing everything in a lawsuit.
But umbrella policies aren’t only for people who have amassed wealth. Some volunteer activities could leave you exposed to lawsuits, such as those who serve on a board of directors for charities.
What Does Umbrella Insurance Cover?
Umbrella insurance covers a wide range of problems and provides funds above and beyond the limits of your other policies, such as your car insurance or homeowners insurance.
Members of your household—such as your spouse and children—are also generally covered by your umbrella insurance policy.
Umbrella insurance provides liability coverage for problems such as:
- Bodily injury to others
- Property damage to others
- The legal costs to defend you in lawsuits related to these problems
- Lawsuits such as defamation, libel, slander and invasion of privacy
- Incidents that happen outside the U.S.
Umbrella Coverage Beyond the Base Insurance Policy
Another advantage of umbrella insurance is that it usually provides coverage that’s not found in a base auto or homeowners policy at all. For example:
- False arrest, imprisonment or detention
- Malicious prosecution
- Wrongful eviction or entry
- Invasion of privacy
What Umbrella Insurance Won’t Cover
Umbrella insurance doesn’t cover your own injuries or damage to your own property. Here are other problems typically not covered by umbrella insurance:
- Business losses
- Criminal acts by you
- Written or oral contracts
- Intentional acts or injury by you
- Damage due to nuclear radiation, war or terrorism
- Communicable disease, such as a lawsuit against you for giving someone herpes
Umbrella Insurance Pros and Cons
Umbrella insurance is a smart choice for those with significant assets or anyone seeking extra peace of mind. But not everyone needs umbrella insurance. You may not find it necessary if your assets are minimal or you’re already well-covered by existing policies. It’s important to weigh the drawbacks and benefits based on your personal situation.
| Pros of Umbrella Insurance | Cons of Umbrella Insurance |
|---|---|
| Extended Coverage It often covers risks that your primary policies might not, such as libel and slander. | Extended Coverage May Not be Necessary If you already have high liability limits on your existing policies, you may not need the additional coverage from an umbrella policy. The extra coverage might not be needed if you don’t have significant assets or you’re not at high risk of being sued. |
| Protection Against Major Lawsuits | Doesn’t Cover All Situations While umbrella insurance provides broad coverage, it doesn’t cover everything. For example, it won’t cover your own injuries, damage to your own property or business-related liabilities unless you have specific policies for those situations. |
| Relatively Affordable | Required Limits May Hike Base Costs You typically need to have certain amounts of auto and home insurance coverage before you can purchase an umbrella policy.This can mean higher costs for your base policies. |
Do You Need Umbrella Insurance?
Wealthy households in particular need personal umbrella insurance to protect their assets from large lawsuits. A wealthy individual or family can be a prime lawsuit target. But even if you’re not wealthy, you might engage in activities that could increase your chances of facing a lawsuit, such as having dogs or a swimming pool.
Extra Coverage to Protect Your Assets
Umbrella insurance is a good way to buy extra coverage to protect your assets. For example, if you cause an expensive car accident that injures others, assets such as your bank account, real estate, vehicles and anything of value could be seized if you lose a lawsuit. You may also have to turn over a portion of your wages if you don’t have enough assets to satisfy a judgment.
If you get sued because of an accident, your umbrella insurance starts to pay out when your car insurance liability limits are exhausted and will pay up to your umbrella policy’s limit. You generally want to buy enough umbrella insurance so that your total liability insurance amount covers your net worth.
Who Has High Risk Potential for Lawsuits?
Your lifestyle or activities may put you at a higher risk of facing a lawsuit. Examples of circumstances that could increase your chances of being sued include:
- You serve on a charitable board.
- You have kids living at home.
- You have a swimming pool, pond or trampoline.
- You have dogs, horses or other large animals.
- You manage a family trust.
- You host large parties in your home.
- You employ household staff.
- You own rental properties.
- You have a high public profile.
How Much Umbrella Insurance Do I Need?
When selecting the right amount of coverage, there are things to consider.
- Value of your assets: An umbrella policy should cover at least your net worth—this is generally what you stand to lose in a lawsuit.
- Potential future income loss: Your future income could also be at risk in a big lawsuit. Even if you have a limited income now, consider your potential future income. For instance, if you’re a medical student, you should consider your future earning potential.
A long legal proceeding is stressful and can potentially ruin a reputation, whether or not the lawsuit was baseless. Purchasing an umbrella policy won’t ease the stress, but it can save everything you’ve worked so hard to build.
How Much Does Umbrella Insurance Cost?
Umbrella insurance costs an average of $383 a year for $1 million in coverage, according to an ACE Private Risk Services report, a company that sells high net worth personal insurance and operates under the Chubb name.
When you’re getting an umbrella insurance quote, an insurer will base the rate on factors such as:
- Where you live
- Your credit history
- Your driving record
- Your risk of filing an umbrella insurance claim
Average Umbrella Insurance Cost for a Person With One Home, Two Cars and Two Drivers
| Umbrella insurance limit | Annual cost of umbrella insurance |
|---|---|
| $1 million | $383 |
| $2 million | $474 |
| $5 million | $608 |
| $10 million | $999 |
Average Umbrella Insurance Cost for a Person With Three Homes, Four Cars, One Boat and Three Drivers, Including One Driver Under Age 25
| Umbrella insurance limit | Annual cost of umbrella insurance |
|---|---|
| $1 million | $563 |
| $2 million | $713 |
| $5 million | $933 |
| $10 million | $1,578 |
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Purchasing Umbrella Insurance
Umbrella insurance is commonly available from insurers that sell auto, home and boat insurance. You’ll generally need to buy umbrella insurance from the company that provides your auto and/or homeowners insurance. Umbrella insurance is also available to people who buy renters insurance.
Insurance companies that offer umbrella insurance include:
- Allstate
- American Family
- Auto-Owners
- Chubb
- Country Financial
- Erie Insurance
- Farmers
- Nationwide
- Progressive
- Shelter
- State Farm
- Travelers
- USAA (available only to military members, veterans and their families)
- Westfield
If you buy your home and insurance from the same company, you may get a bundling discount—even if you don’t buy umbrella insurance.
What Should I Consider When Choosing a Personal Umbrella Policy?
When you are choosing a personal umbrella insurance policy, make sure you buy an adequate coverage amount. Here are some tips:
- Estimate the total value of your assets. Your umbrella coverage amount should align with your net worth.
- Review your insurance policies. Look at the liability insurance amounts on your existing policies, such as your car insurance and home insurance. If the liability insurance is insufficient for covering your net worth, look into umbrella insurance.
Since your financial situation can change over the years, it’s a good idea to review your insurance policies regularly. For example, if your net worth grows, you want to increase the liability limits on your insurance policies (including your umbrella policy).
Is Umbrella Insurance a Good Investment?
An umbrella insurance policy can be an excellent addition to your insurance portfolio if you need liability coverage that goes beyond what your base car insurance or home insurance policies provide. Umbrella insurance is a good way to cover your net worth if you were to get hit with a lawsuit. You can buy a $1 million umbrella insurance policy for about $32 per month.
Without umbrella insurance, you risk losing assets like your home and bank accounts if you’re found responsible for other people’s injuries or damage to their property. For instance, if you cause a severe car accident and your car liability insurance is insufficient to cover a judgment against you, you could then make a claim on an umbrella policy.
If you don’t have many assets and can’t afford the higher auto and home insurance limits required to obtain umbrella insurance, then an umbrella policy probably isn’t a good fit.
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Umbrella Insurance Frequently Asked Questions (FAQs)
How much is a $1 million umbrella policy?
A person with one home, two cars and two drivers will pay an average of $383 a year for $1 million in umbrella insurance, according to an ACE Private Risk Services report. A person with three homes, one boat, four cars and three drivers (including a driver under 25 years old) would pay an average of $563 annually for $1 million in umbrella coverage.
Is umbrella insurance the same as excess liability insurance?
Yes, the term umbrella insurance is often used to mean excess liability insurance.
If you have assets that total more than your home insurance and car insurance policy limits, you may benefit from extra coverage in case you cause damage or injuries to someone else that exceeds your base policy’s coverage limits.
What is the most that an umbrella insurance will pay?
The most your umbrella insurance will pay is up to your policy limit.
For example, if you have a $1 million umbrella insurance policy and you are found liable in a lawsuit, your umbrella insurance will only pay up to that amount. You can generally buy umbrella insurance in increments of $1 million, such as a $10 million umbrella insurance policy.
