Umbrella Insurance: What It Is and Why You Might Need It

Your mortgage lender requires you to have homeowners insurance, and the lender for your vehicle’s loan requires you to have automobile insurance. Umbrella insurance is not required, so do you really need it?

The answer boils down to your liability risk.

Your homeowners and vehicle insurance will include liability coverage, but there are limits. If your lifestyle, hobbies, or volunteer activities expose you to greater risks, it could be a good idea for you to increase your liability coverage by adding an umbrella insurance policy.

What Is Umbrella Insurance?

Umbrella insurance is liability insurance that covers losses beyond the limits established in your homeowners and vehicle policies.

If someone is seriously injured in an accident on your property, your policy limits might not be enough. Umbrella coverage picks up where your other insurance policies stop; when they reach their limits, the umbrella policy kicks in.

Accidents happen — this is why we have insurance: to protect our finances. However, lawsuits can be very expensive. If you are found to be at fault, your current insurance may not be sufficient to cover what you’ve been deemed responsible to pay. The other party doesn’t just go away after being awarded up to your policy limits. A court could award a portion of your future earnings to cover costs — meaning you could be paying damages for a very long time.

Who Needs Umbrella Insurance?

More people could probably benefit from having umbrella insurance than they probably realize. 

Healthcare and rehabilitation costs are higher than ever, so if a person gets injured, they have an incentive to find someone else to contribute to paying the bills. If you are found to be at fault, that “someone” is going to be you.

Individuals with high — or even moderate — net worths can be targets for lawsuits. If you fall into this group, you should definitely consider purchasing umbrella coverage. However, umbrella insurance covers other risks, too. 

Here are some possible scenarios that could make umbrella coverage a good idea:

• Swimming pools or hot tubs: If you have a water feature, you probably already pay higher insurance premiums because accidental drownings are a risk. Umbrella insurance adds an extra layer of protection. 
• Trampolines or elaborate playsets: This equipment also poses a higher risk for injuries. If you have these types of structures in your yard, you might want to add umbrella insurance.
• Pets: Pets can be a great addition to your family, but they pose certain added risks. While dogs might be the most common pets to present an injury risk, they aren’t the only ones. Reptiles can pass salmonella infections to humans, causing significant illness or even hospitalization and death. Horses can kick or buck riders, resulting in serious injuries. Cat scratches or bites can lead to infections. Exotic pets can pose significant risks, due to unpredictability. Read more about how certain dog breeds can affect your insurance here.

You might also want to think about the risks your non-work activities may pose. Volunteer positions — or even simply being outspoken in the community — can expose you to risks you might not have ever even considered.

It’s sad and frustrating that volunteering in your community could expose you to getting sued, but that’s the type of litigation risk that liability insurance is supposed to cover. Umbrella coverage is there to protect you if the damages go beyond the limits of your homeowners policy. Umbrella insurance even covers damages that are not covered by standard insurance policies, including libel, slander, or defamation.

The main questions that need to be answered when considering adding an umbrella policy for volunteer work are how much risk are you exposed to and what type. Volunteering to coach children in sports has different risks than being a volunteer at the library. Volunteering at a church will have different risks than being a member of the PTO.

It’s important to note here that if you are on the board of a volunteer group or nonprofit organization, you should ask about their coverage for officers and see if you are covered. This is important because decisions you make in an official capacity as a board member would not be covered under a personal umbrella policy. 

How Much Umbrella Insurance Do I Need?

The level of umbrella insurance you need will in part be based on your risk, but a common rule of thumb is to have coverage that equals your net worth.

To determine your net worth, add up all of your assets including: 

• Your home
• Vehicles
• Investments
• The value of your retirement accounts

If your net worth is $1 million, you should consider purchasing an umbrella policy with at least $1 million in coverage. You might even want to purchase a higher level of coverage depending on your level of risk exposure.

What Does Umbrella Insurance Cover?

Since umbrella coverage is designed to protect you over and above your standard policy coverage, it provides additional protection for much of the same circumstances.

• Bodily injury: This liability protection covers expenses related to injuries to another person where the policyholder is deemed to be at fault. Hospital bills, medical expenses, and rehabilitation are the types of things that are included. Events such as car accidents, dog bites, and injuries at the policyholder’s home are examples of scenarios where bodily injuries could happen.
• Property damage: This liability protection covers expenses incurred when property is damaged and the policyholder is found to be at fault. Car accidents that exceed your policy limits — such as if you were to hit a rare or antique sports car — would be situations where an umbrella policy would kick in.
• Other personal liability: This is the one category that might not even be covered under your standard homeowners insurance policy. Think: slander (a spoken statement) or libel (a written statement). Social media represents one of the most fertile grounds for libel accusations the average person might encounter. Individuals who never previously had a platform on which to make libelous statements now have near-constant access to such opportunities.

How Much Does Umbrella Insurance Cost?

Umbrella insurance coverage is designed to help with liability claims that are above your insurance policy limits. Because of this, you might be required to increase those policy limits up to a certain level before your insurance agent will write an umbrella policy.

Umbrella policies are typically fairly affordable, with a $1 million policy averaging between $150 to $300 a year. Every additional $1 million in coverage will average about another $50 to $75 more on the policy. Of course, rates will vary depending on your risks and other factors. The best way to find out how much an umbrella policy might cost you is to contact your agent for a quote.

Who Offers Umbrella Insurance?

A wide range of insurance companies offer umbrella insurance. If your insurer offers multiple lines of insurance such as homeowners, renters, vehicle, and other forms of property insurance, they likely offer umbrella insurance coverage as well. 

Since it’s designed to offer protection on top of your existing policy limits, take a look at your existing policies first to be sure what your current policy limits are. Talk to your insurance agent to see if an umbrella policy is a good idea to protect your home and family.

The Bottom Line

We live in a litigious society — one in which healthcare and other costs are rising dramatically. Your current policy limits might not be enough to cover what you’re responsible for if you’re found to be at fault in an accident.

Unforeseen events happen — it’s part of life, and it’s why we have insurance coverage. However, if a routine accident becomes an even larger than expected event, umbrella coverage is there to protect what you’ve built.

Disclaimer: 

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