Broker Check

Should You Carry Umbrella Insurance for a Rainy Day?

August 14, 2023

Your property and casualty insurance normally provides liability coverage for you and your family. If your car crashes into someone else, liability car insurance may pay for your legal defense and any judgments or settlements. Or if a guest falls on your property, homeowner’s liability insurance may cover medical expenses.

But the safety net of liability insurance only stretches as far as the coverage amount you have. If you have significant assets that you could lose in a lawsuit, you should consider higher levels of liability insurance.

This is where umbrella insurance policies (sometimes referred to as personal umbrella policies) come into play. An umbrella policy is designed to help prevent financial ruin from a catastrophic event for which you or a family member may be financially responsible.

What is Umbrella Insurance?

Umbrella insurance provides additional coverage beyond the liability insurance already in your auto, homeowners and/or watercraft insurance policies. It is for those expensive situations where medical bills or repairs exceed your “base” auto, home or boat policies. For example, if a neighbor’s child has a serious accident in your swimming pool, you may be sued for an amount that exceeds your homeowner’s liability limits. Or if you accidentally hit a cyclist with your car, you may be sued for medical bills and pain and suffering in an amount that exceeds your automobile liability insurance.

How Does Umbrella Insurance Work?

Umbrella insurance kicks in when your base liability limits have been reached. For example, if you are at fault in a multi-vehicle accident and are successfully sued for $1 million, your auto liability insurance typically covers only $300,000-$500,000 in damages. With a $1 million umbrella policy, you may receive an additional $1 million in liability coverage.1 So if your auto insurance covers only $300,000 of expenses, your umbrella policy picks up the extra $700,000 in damages.

What Does Umbrella Insurance Cover?2

Umbrella insurance typically covers the liabilities covered by your automobile or homeowner’s policies such as bodily injury and personal injury. Many policies cover property damage for which you may be held responsible. “In other cases, such as a libel or slander lawsuit, it may provide liability protection for situations that may not be covered by other types of insurance.”3 And if you own rental property, umbrella insurance provides liability coverage beyond what your renter's policy covers. Finally, your umbrella policy may cover attorney fees and other expenses related to the lawsuit that were not covered by your homeowner's or auto policy.

Umbrella insurance covers not just the policyholder but also other members of their family or household. If your teenager is responsible for automobile injuries, your umbrella policy may cover the injured parties’ medical bills. That being said, you should make sure that you understand how your policy defines a household member, so you’ll actually have the coverage you need.4

What Does Umbrella Insurance Not Cover?5

Your personal property.
While personal umbrella insurance is designed to help cover expenses if you are held responsible for damages to someone else's property, that coverage typically does not apply if you cause damage to your own property.

Business losses or liability related to your business or profession
Losses related to the operation of your business or damage to your business property would generally not be covered by a personal umbrella policy. Liability related to your business or profession is usually not covered.

Criminal or intentional actions
A personal umbrella policy usually won't protect you from the consequences of your own intentionally harmful or illegal behavior, including intentional libel or intentional defamation of character.

Personal umbrella insurance typically won't protect you from any liability that arises in connection with an oral or written contract you've entered.

Who Needs Umbrella Insurance?

Almost anyone may benefit from personal umbrella insurance. That’s because anyone may be sued. This includes individuals with limited assets who have future earnings potential.  If you plow into a bus, causing multiple bodily injuries, the settlement could be millions. Not only could your net worth be wiped out, but, if you’re still in your earning years, your future earnings could be attached.6 Consequently, even if you’re just starting out in your career, you may want to consider purchase of umbrella insurance.

That said, some people may be more at risk than others, and consequently more in need of umbrella insurance. If you are lucky enough to be wealthy, you may be more targeted for lawsuits. You may also be at higher risk for lawsuit if (1) you serve on a charitable board, (2) you are a landlord, (3) you have a swimming pool or trampoline, (4) you have dogs or other large animals, (5) you employ household staff, or (6) you host large parties in your home.7

How much Umbrella Insurance Coverage Do You Need?

Although opinions may vary on this issue, one source recommends that you should consider the following factors when selecting the amount of coverage to purchase.

  • The Value of your assets. An umbrella policy should be the value of what you stand to lose in a lawsuit.
  • Potential future income loss. Your current assets and future income may be at risk in a lawsuit. For example, if you are a medical student, you may want to consider your future earnings potential.8

You should Coordinate Your Insurance Coverage  

Umbrella policies generally specify minimum underlying coverage requirements. If your underlying insurance doesn’t meet these minimum requirements, you may have to pay the difference out of pocket. For example, assume that you are successfully sued for $1 million in damages for an auto accident. If your underlying auto insurance covers only $200,000 in damages while your umbrella policy requires $300,000 coverage, you may have to pay the $100,000 difference out of pocket. You want to coordinate the coverage limits on your car/home/renters policies with the umbrella policy to be sure there’s not a gap in coverage. 

You should also make sure that all owners of insured property are covered by your umbrella policy. For example, if a revocable trust owns your home, you should ensure that your umbrella policy adds the trust as an additional insured.9

Finally, you should coordinate your umbrella policy when updating your other property and casualty insurance. For example, if you trade in your old automobile for a new one, your umbrella policy should be updated in addition to your auto insurance.

How Much Does Umbrella Insurance Cost?

Here is the good news. Umbrella insurance is relatively inexpensive compared to other insurance you may purchase. According to one source, to insure up to $1 million of additional liability costs between $150 and $300 annually. Each additional $1 million of umbrella coverage might cost between $100 and $125 annually.10

The Bottom Line 

An umbrella insurance policy can play a significant role in protecting you and your family from financial ruin. There are many factors to consider before purchasing such a policy. We suggest that you speak to a professional in advance. Remember, we are here to help.

Doug Lemons, CFP®



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