Umbrella Insurance: Do You Need It?

Like an umbrella that covers your head to protect you from a rainstorm, an umbrella liability policy “covers” your other property insurance, thereby providing additional protection.

Policy benefits start where other polices end. For example, after claims exceed $300,000 of liability coverage on an underlying auto or homeowners policy. 

Umbrella policies provide coverage for $1 million, or million-dollar increments above a policyholder's underlying auto, boat, and/or homeowners/renters insurance liability limits.

Another good term to describe how umbrella liability policies work is “piggybacking.” 

If you were sued for $850,000 for injuries caused to others and had $300,000 of underlying property insurance liability coverage, a $1 million umbrella policy would cover the remaining $550,000, thereby “piggybacking” $550,000 onto $300,000. 

Umbrella policies also pay for legal fees involved in a lawsuit.

To summarize, umbrella insurance protects policyholders’ assets from large claims when they are found at fault. 

People typically purchase a policy when they accumulate significant ($1 million+) assets that require protection against potential lawsuits and liability judgments.

Below are some key points to consider:

¨     Umbrella policies protect assets and/or future earnings from damages arising from lawsuits or settlements

¨     Premiums typically cost about $250 to $400 annually for an initial $1 million of coverage; shop around

¨     Additional increments of $1 million of coverage typically cost about another $150 to $250 per year

¨     Policies typically require the purchase of underlying homeowners and auto insurance from the same company

¨     Policy discounts may be available when various types of property insurance are “bundled” together

¨     Umbrella policies can protect against charges of libel and slander

¨     Policies also cover damages arising from service as a director or officer of a non-profit organization board

 

Don’t think you need umbrella insurance? Consider these possible liability scenarios:

¨     A neighbor’s child dives into your pool and is paralyzed

¨     A delivery person or mailman breaks a leg on icy steps and sues for lost earnings and damages

¨     A non-profit board you serve on is sued for negligence and has inadequate coverage for its officers

¨     Your teenager driver child causes a multi-car auto accident resulting in fatalities

¨     You have a swimming pool, hot tub, or dog and live in a neighborhood with small children

¨     You are sued for damages involving a boat that you rented on vacation

¨     You employ a contractor, nanny, or housecleaner that does not carry liability or worker’s comp insurance

¨     Your child hosts an unauthorized party with alcohol in your absence and drunken guests get injured

¨     You are found liable for property damage caused by a car that you rented overseas

 

A key point to consider is that the scope of injury claims can be large dollar amounts that are well above standard policy limits and are generally outside of your control. For example, medical bills and/or property damage resulting from an accident or replacing decades of lost wages for a seriously injured high earner.

 

Over 80% of umbrella policy losses are related to automobile use, which is something to consider if you have a long commute to work or have to drive on roads that can become treacherous in icy winter weather.

 

One large personal injury claim can put years of accumulated savings for retirement and/or decades of future earnings at risk. If you are fortunate enough to earn a good salary or to have been able to build wealth over time, consider protecting your hard-earned money with umbrella insurance. 

Even if you are not a millionaire, your future income and assets could be at jeopardy with a large claim. For around $25/month, you can have $1 million in liability protection and peace of mind.