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 Umbrella insurance provides extra liability coverage on top of your existing policies, which can protect your assets if you’re sued for a large amount.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 It pays for legal costs, settlements and judgments that exceed the limits of your other insurance policies. This can be particularly valuable in cases involving serious accidents or incidents. | 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 Considering the amount of additional coverage provided (typically starting at $1 million), umbrella insurance is generally 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.
People with significant assets can benefit from an umbrella policy. There are other instances when umbrella coverage is a wise purchase, such as if you own 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.