Umbrella insurance is not top of mind for most people like other forms of insurance. I rarely hear anyone mention it (definitely not our trusted personal finance gurus). Up until about a year ago, I had little knowledge about what umbrella insurance was either. It’s actually quite boring (most good things in personal finance are).
However, as part of a recent shift in how I view the value of insurance policies, I am now an umbrella insurance policy holder and view it as an essential form of insurance for just about everyone. And it’s super cheap for the coverage it offers. Unfortunately, it’s probably one of the least utilized types of insurance. So… I wanted to pull back the veil a bit through an umbrella insurance basics post to give you something to chew on to determine if it’s right for you.
What is Umbrella Insurance?
Umbrella insurance offers protection from the unexpected. Well, I guess that’s true for all insurance policies, isn’t it? Specifically, an umbrella insurance policy is protection against loss that may result from litigation against you. You’ve probably noticed with your auto and home insurances that there is a part of your coverage that pertains to liability. Primarily, umbrella insurance coverage is meant to protect you in the event that you are deemed at fault for damages to property or people above and beyond your home and auto insurance liability (or motorcycle, watercraft, or other vehicle) coverage levels. It covers other areas as well – but more on that later.
If you have assets (home, savings, retirement accounts, etc.), umbrella insurance protects those assets in the event that you lose a lawsuit. If you have minimal assets, does this mean you should tune out now? Not exactly. Being forced to sell your home for its equity or even garnished future wages could be a result of not having assets to pay off a settlement. Damn!
Here’s an example of umbrella insurance at work: you back out your car and accidentally run over that rotten neighbor kid (the one who’s way too old for his Huffy with training wheels that throws rocks at your dog). The kid only suffers a few bruises, but his parents slap you with a $1,000,000 “kid has nightmares” lawsuit so they can finance their midlife crises. You lose. Your auto insurance covers $200,000 of the damages, but you are responsible for the other $800,000 – more than your entire net worth. But wait! You have a $1,000,000 umbrella insurance policy, which swoops in and covers the $800,000 you owe. You don’t lose a dime.
Bottom line – unfortunately, we live in a very litigious society, and if nothing else, an umbrella insurance policy can offer you a bit more peace of mind so you can sleep better at night knowing you have some protection against losing everything you have worked (or will work) so hard for.
What Does Umbrella Insurance Cover?
In addition to extending home and auto (and other vehicle) insurance liability coverages, umbrella insurance also commonly covers you in the following areas:
- property damage liability
- landlord liability (for owner’s of rental units)
- bodily injury liability
- libel/slander/defamation lawsuits
- false arrest
- malicious prosecution
- violation of privacy rights
- wrongful eviction or wrongful entry
- other types of lawsuits
Payment of defense costs, attorney fees and other expenses associated with the lawsuit, even if the lawsuit is groundless or frivolous in nature, are also covered. The coverage of those costs and fees is in addition to the policy limits in my policy, but some insurers include it as part of the coverage limit.
Who is Covered by an Umbrella Policy?
When you purchase an umbrella insurance policy, it doesn’t just cover the person making the phone call, but also:
- the spouse, if the spouse is living with the insured
- resident relatives (i.e. children, elders)
- household residents under the age of 21 who are under the care of the insured
- anyone using a vehicle owned by the insured
- any person or organization that is legally responsible for the insured, while the insured is using a covered motor vehicle
What Does Umbrella Insurance Not Cover?
Umbrella insurance is a liability coverage. It is not a “go out and commit any crime and we got your back” coverage. I can’t list everything out here, but I’ll list out a few of the common areas of liability that are not covered by umbrella coverage:
- malpractice
- business pursuits (outside of landlording)
- worker’s compensation
- damage intentionally caused by any insured
Check with your potential insurer for a more exhaustive list.
How Much Does an Average Umbrella Insurance Policy Cost?
Umbrella insurance is commonly sold in $1 million dollar increments, up to $5 million typically. The cost for a policy, at those dollar levels, is actually extremely reasonable.
My insurer (who I have home and auto insurance with) gave me the following quotes:
- $1 million: $216
- $2 million: $345
Premiums will vary for everyone, given unique risks, but those quotes are in line with umbrella insurance policy average costs. According to an independent agent quoted by Kiplinger, a $1 million umbrella policy typically runs $175 to $300 a year for a family with a house and two cars and no special risks.
Not bad, eh?
With each ascending $1 million you add, you will see the price drop, because less and less lawsuit verdicts will come in at the higher levels.
How do you Qualify for Umbrella Insurance Policy Coverage?
Anyone can get umbrella insurance, but some insurers don’t sell it in certain states.
Providers of umbrella insurance often require that you have a base level of minimum bodily injury and property damage liability coverage for both your auto and home insurance. These limits do vary by insurer, but you generally must have:
- $250,000 per person for bodily injury and $500,000 per accident on your auto insurance policy
- $100,000 per accident for property damage on your auto insurance policy
- $300,000 per occurrence for personal liability, bodily injury, and property damage liability on your homeowners insurance policy
Do I Need an Umbrella Insurance Policy?
I can’t give a prescriptive one-size-fits-all answer to whether you need an umbrella insurance policy, but I’ll give some pointers. There’s a reason that umbrella insurance is tied to vehicle and home insurance policies. If you own either, there is a greater likelihood that you are at risk for litigation. And the more people you have using your vehicles (and the more you use those vehicles), the greater you are at risk as well. I guess the same could be said for how often people visit your home or simply walk by it.
If you don’t drive a vehicle, your risk for an event that would result in litigation against you goes down.
If you don’t own a home, your risk for an event that would result in litigation against you also goes down.
If you don’t drive a vehicle or own a home, you are a low risk profile. You are not untouchable, but the likelihood that you would be found liable in a lawsuit goes down quite a bit. However, that’s also going to kick the cost of an umbrella policy down quite a bit for you.
If you do own a home or drive a vehicle, you’re at much greater risk for litigation and should strongly consider getting umbrella coverage.
Umbrella Insurance Discussion:
- Do you have an umbrella insurance policy? Why or why not?
- Have you or someone you known been covered by an umbrella insurance policy? Share the story.
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I had an umbrella policy for $5M during an event that I hosted several years ago. I have kicked the idea around about getting a $1M policy just for the very reasons you stated above: home, cars, rentals. I have yet to pull the trigger though. I’ve never been a big fan of paying for insurance. I rarely have ever used it for my autos (except to satisfy the state) and have never used it for my homes. The only insurance that I actively use is my medical/dental/optical and that insurance infuriorates me on a regular basis.
Who is a big fan of paying for insurance? It’s probably the least loved of all expenses. You don’t know you need it until shit happens, then you are thankful for having it. I hope to never actually use my umbrella insurance (or home insurance, for that matter).
I’ve had it for a few years now, but I feel like a sucker for getting it. I’m very low risk and paranoid enough–I know the insurance company is making a fortune off of people like me.
Low risk = low premiums, but yeah, there are certain folks who probably don’t need umbrella insurance. Best left to the individual though – I’m simply here to give some guidelines from what I’ve learned.
I don’t think I’ll get umbrella insurance, but all the people I’m about to sue should.
For real though, thanks for the post! I never knew what this was and think it might be worth getting.
Maybe you should get one in the event that they counter-sue. ;-)
I live in Los Angeles County which alone is scary. I’ve always carried an Umbrella policy. We have a swimming pool and I have a fairly high net-worth. I’m an ideal candidate for a lawsuit if someone, e.g,that snotty neighbor kid using my driveway for his skateboard course, is injured at my house. That’s how it works around here. I can tell you stories about people getting sued over stupid issues and needing to pay up. Take G.E’s. advice and get the coverage. $1m Umbrella and it covers my 2 autos $300/year.
Hi GE! Who is your agent that provided you about 400$/year quote on your home! I can’t find anything that low!
Liberty Mutual.
Liberty Mutual quoted me around 650$ for 1106sq ft home!
I had really low rates with Liberty Mutual back in 2007-2010.. but something changes.. rates went up a couple of times…
I’m using American Modern Insurance Group AMIG… no complaints and rates are back down to around $500 but have that on a 2200 sq ft home.
Your rates are based on zip code too… so it could easily just be the area you are in..
I carry umbrella insurance to supplement my home and auto insurance. It is an individual decision each of us has to make. I personally would rather have the coverage in case of litigation than be caught in the dark and have to sell assets to get out of lawsuit debt. With lawsuits being in the million dollar plus range once can be bankrupted real quick. My opinion…
Whether you own a home or not the risk of litigation is the same for the possibilities mentioned. For those who rent, the umbrella policy will be excess over and above their renters insurance given the renters insurance has sufficient liability coverage to meet the umbrella’s maintenance requirement.
I’ve never heard of an Umbrella Insurance until now but it makes complete sense because we do live in a world where a lot of people are looking to screw over other people and take them to the cleaners. I’ll definitely look into this, thanks for sharing GE.
Are there any particular reputable insurance brokers that you would recommend for umbrella insurance?
All of the big ones sell it. It’s usually best to go with the one you have home/auto through, so you can get multi-policy discounts.
Given you’ve already called around to get the best rates, that is.
You mention landlording. What are the reasons and what types of costs are involved in getting an umbrella policy if you’re a landlord. Any landlords have this?
I feel like the insurance companies know the risks of these events much better than the average person does. I think that an emergency fund would be the smarter way to go for most people. Just my opinion, though.
An emergency fund of $1 million dollars that you could lose in litigation? Good luck with that.
One can’t lose $1 million dollars if they don’t have it. As my mother always said, “You can’t squeeze blood from a turnip.”
My point is that the insurance companies know the numbers much better than the average person; there’s no doubt that they are making money on those policies.
Yes, those policies will give you a peace of mind in the RARE instance that something does happen, but I think an emergency fund would be the better choice for most people. The most common big-expense events, such as car accidents, are already covered by other insurance policies.
Plus, many people have trouble with getting their insurance companies to pay for these events as is.
Of course insurance companies are making money as are auto dealers, supermarkets, etc. They are in business to make a profit. However, if you are sued above and beyond your homeowner policy coverage or automobile coverage and can’t pay you may be living in the street and walking. The choice is ours to make and I’ll continue to carry my umbrella coverage. I’d rather be safe than sorry….
Fair enough! It is definitely a personal decision at the end of the day.
My point was that you can’t compare an emergency fund to an insurance policy that protects from costly litigation that could wipe out net worth. An emergency fund can cover common small emergencies, and everyone should have one as such, but umbrella policies are for entirely different (and rare) scenarios.
Everyone needs this, but “how much one should have” is the real question. getting insured is based on how you live your life, what you do for a living, where you go for a living, how much you can afford. Always evaluate yourself before signing the dotted line.
Thanks for educating us on this topic, G.E.
Myself, I have kids that are aged 2,4, & 13. I think I’ll at least wait until my oldest turns 16 (and can drive) before I get the umbrella insurance policy.
I am so glad you post on topics that aren’t normally covered or considered in other finance blogs. Keep up the good work!
I am debating about the umbrella policy. I have a 16 year old who will be getting her license and adding a car to our policy. My initial thought was that I could lower my 100/300/50 insurance to the minimum coverage required by my state (PA). I feel like my insurance agent will not advise me to my benefit if it will loose money for him. So I guess my question is if I have two older model cars and drop my comp and collision the umbrella policy would not cover any accidents, etc? I would hate to make these changes, have an accident and then find out it’s not covered.
Thanks for your time.
PS-I also got the $25 from Starkist! I did not see an option to pay for a subscription? It was free?
This site is free – it was a joke.
My recommendation is to find another insurance agent as it appears you have no trust in your current one. An insurance agent who is unwilling or unknowledgeable isn’t worth his weight. You can also pose your concern as a question on the internet (Google) and perhaps get more information. This is an individual choice. Good Luck.
My understanding is that you’re probably best off just increasing each of your house and auto policies to $1M since those are the primary concerns, as it is significantly cheaper than the umbrella policy. Just ran the quick tool on my insurance to see the premium increase to bump those other insurance minimums up from the umbrella minimums to $1M vs an umbrella quote alone. Raising auto and home is about half the price of the umbrella quote. If you’re not worried about those other types of lawsuits might want to look into this.