When it comes to growing wealth, the best offense can be a good defense. In particular, having insurance policies in place that can protect you from catastrophic events can be important. One type of insurance policy you may have hear about is umbrella insurance.
Umbrella insurance is a type of insurance that protects your wealth when your car or homeowners insurance don’t protect you. But this extra insurance is an extra cost. Is it ever worth it? We explain how umbrella insurance works, and who should buy it.
What Is Umbrella Insurance?
Umbrella insurance is insurance that covers the “gaps” in your regular car or homeowners insurance policy. It protects you if you’re at fault for a significant accident (imagine your RV bumping into a NASCAR vehicle at a race), or if you’re sued for negligence or liability.
The umbrella insurance policy can provide additional financial security for you in any situation where your primary insurance policy (such as car, homeowners, or boat insurance) doesn’t fully protect you.
Traditionally, most people who carry umbrella insurance carry between $1 million and $5 million in additional insurance.
When Is It Useful?
Since umbrella insurance is an insurance policy that you carry in addition to car, home, and health insurance, it’s useful to consider when it might be useful. The number one area that umbrella insurance comes in handy in is in the event that you get sued - typically for an auto accident or an accident that happens in your home.
You may think, “I don’t go to stupid places with stupid people who do stupid things, so I’m not going to get sued.” But that’s not necessarily true. Anyone with a modest to high net worth could be the target of a lawsuit. A tenant on your rental property could sue you for negligence. You could get into a small fender bender and be required to pay massive penalties for negligence.
Landlords, small business owners, anyone who serves on a board of a nonprofit, anyone who is suspected of having a high income (doctors, lawyers, engineers, etc.), and even people who volunteer in civic organizations (including coaching kids sports) could be sued.
Some of the most common umbrella insurance claims include (see this interesting forum thread on it as well):
- Car accidents (especially when there are multiple vehicles or multiple people injured)
- Injuries at your home (including dog bites, trampoline injuries, and more)
- Defamation claims arising from reviews, social media, or other mediums
How Does an Umbrella Policy Work?
The exact details of umbrella insurance policies vary from policy to policy, but the policies follow a generalized pattern. In general, an umbrella policy covers you for almost all liability costs up to the policy amount. If you get sued, your umbrella policy will cover legal fees associated with settling the case, as well as the amount of the judgement against you (that isn’t covered by your auto or homeowners policy).
Umbrella policies also don't start to take a claim until a "minimum" has been met. For example, you may have $100,000 in liability coverage on your auto policy, and your umbrella policy will cover you after $100,000 in claims have been made (up to the policy amount).
When you get sued, you will call your umbrella insurance company right away, and the insurance company will help you find an appropriate lawyer to help you through the litigation process. Most umbrella policies want to be issued in conjunction with you home or auto policies, as all policies need to work together.
It is important to work with an informed insurance broker when you first buy an umbrella insurance policy. Be sure to explain whether you operate a business or rental properties. The broker can explain the types of insurance you need to have in place before you can buy umbrella insurance. They can also make sure you don't have any gaps in coverage (such as auto ending at $100,000, but the umbrella policy not kicking in until $300,000).
How Much Does It Cost?
Costs for umbrella insurance depend on your age, your personal history (especially whether you’ve been convicted of a crime or been sued before), how many assets you own, and your exposure to the public. In general, a $1 million umbrella insurance policy will cost $150 to $360 per year when you buy it through your car and homeowners insurance company.
But the direct cost of umbrella insurance isn’t the only cost to consider. Many people need to increase their auto liability and homeowners liability coverage before they can buy umbrella insurance (to avoid the gaps we mentioned earlier). The increased coverage can come with increased costs, meaning your total insurance costs could increase at least $200 to $500 per year (including the cost of the umbrella insurance).
Where To Purchase It?
You would look for an umbrella policy from the same company that does your home and auto insurance. Most umbrella insurance companies require you to have home and auto with them to issue you a policy - since home and auto incidents are the biggest reasons an umbrella policy may be triggered.
If you haven't shopped around for a policy in a while, check out these guides:
Do I Need to Buy Umbrella Insurance?
There’s no hard-and-fast rule for when to buy umbrella insurance, but there are a few guidelines.
I think that all doctors and lawyers should strongly consider buying the insurance, since they are targets for lawsuits. Small business owners and landlords should also plan to buy it, as they have high liability risks.
Most other people should only buy umbrella insurance once they have enough assets to justify the cost. If you have a paid-off house, or more than $100,000 outside of retirement accounts, umbrella insurance is probably worthwhile.