Is Umbrella Insurance Right for You?

This article has been reviewed by licensed insurance industry expert Moshe Fishman on October 27, 2023.

If you find yourself at fault for a serious accident, your potential liability could end up costing you more than you realize. Your home, your car, and other assets can be vulnerable to loss if you’re not adequately covered. For example, if someone gets seriously injured due to an accident on your property, your homeowners policy limits may not be enough to cover the amount you’re liable for and likely will not cover a lawsuit, court, and legal fees.

The idea of losing your home or auto can be devastating. Leaving yourself and your family exposed to potential financial ruin, however, can be avoided with adequate coverage under an umbrella policy designed to protect your assets. This article explores this extra layer of liability protection to help you decide if this type of coverage is right for you.

What this article covers:

• What umbrella insurance coverage looks like and how it protects you and your family against personal liability situations.
• The coverages that umbrella insurance provides and what is not covered by your existing homeowners, rental, or auto insurance policies. 
• Umbrella insurance does not cover everything and there is a list of typical exclusions to this type of policy.
• What you should consider when determining if you will need umbrella insurance to cover your risks and assets.
• How much you can expect to pay when buying a supplemental umbrella insurance policy.

What you should know:

• According to the Insurance Information Institute, your current personal liability insurance may not protect you against a judgment against you for libel or slander.
• An umbrella policy allows for higher limits starting at $1 million to better protect you and your family against asset losses.
• Umbrella insurance will not cover your injuries or damage to your own property.
• This type of insurance policy covers liability whether or not your car or property are involved in the incident.
• Umbrella coverage is relatively inexpensive when you consider the protection it provides for you and your household.

What is umbrella insurance?

If you have an umbrella policy, this type of policy kicks in when you are found liable for a claim amount that is not covered by the liability limits of your standard homeowners insurance, renter’s policy, or auto coverage. It also covers personal liability situations including lawsuits against you that your current liability insurance may not cover like judgments involving slander or libel.

How does umbrella insurance work?

An umbrella policy is optional and provides additional coverage to your current liability insurance found in your homeowners, rental, or car insurance policies. It works by paying for injuries and damages that go beyond your current policy limits, so you won’t have to pay out-of-pocket when you are found liable and facing a lawsuit. 

Although optional, this type of coverage will help to prevent you from “losing your shirt.” In other words, your covered assets will be protected from loss should someone sue you for an amount greater than what your existing personal liability covers, and you are found legally responsible.

For example, if someone is seriously injured in your swimming pool, your homeowners policy limits may not cover all of the medical expenses or being sued for lost wages from being unable to work. Umbrella insurance will provide that added protection and extend your coverage should this type of accident exceed your standard policy limits. 

In addition, this type of extended coverage provides additional protection to your auto liability insurance, paying damages and medical costs in excess of policy limits for the other driver/passengers when you are at fault in an accident. Let’s say you run a red light in a rush to get to work and hit another vehicle causing serious injuries to the other driver and passengers. If their medical bills exceed the limits of your auto insurance liability policy, your umbrella insurance would cover the remainder.

An umbrella policy protects you from situations that can be catastrophic, exceeding your current liability coverage, allowing for higher limits starting at $1 million. Without this type of coverage, liability claims for damage and medical expenses that you cause can force you to sell your home or deplete your savings and other assets to pay for what your homeowners or auto insurance doesn’t cover. 

What does it cover?

Coverages under a standard liability insurance policy (home or auto) typically includes payment of medical bills from others injured on your property and/or the damage you cause to another person’s property. But what if you’re sued or your current policy limits don’t cover the expenses? Umbrella insurance will extend beyond your current policy limits to cover excess amounts, legal fees, and certain types of judgments not typically covered by standard insurance policies.

You and your household members are covered if you are sued for liable. Lawsuits against you such as libel and slander are also covered under your umbrella insurance policy. Related legal expenses are covered in addition to paying damages and/or medical expenses that exceed your standard policy’s liability coverage. This means that if you lost a lawsuit that will cost you $1 million, your umbrella insurance would cover that amount plus legal costs. 

Umbrella policies can vary with differences in policy details and exclusions. What they have in common is the protection they provide beyond what a normal homeowner or auto policy would cover. They expand your liability coverage in situations not covered by your regular insurance and provide higher limits in more situations including lawsuits against you. 

Here is a short list of what umbrella insurance usually covers:

• Medical bills and property damage expenses that exceed limits of homeowner or auto insurance coverage.
• Lawsuits against you that involve slander, defamation, libel, wrongful eviction, wrongful entry, invasion of privacy, false arrest, and other covered personal liability judgments.
• Legal fees/expenses related to lawsuits brought against you for injuries or property damage.
• Personal liabilities that occur during travel outside of the country.
• Wide range of personal liability situations that your standard policies don’t cover.

Examples of what an umbrella policy usually covers include these types of scenarios:

• Your house cleaning person trips over a hole in your driveway causing serious injury and sues you for medical expenses and pain and suffering, which are more than your homeowners policy limits.
• Your dog bites a repair person on your property and your regular policy doesn’t cover the extensive lawsuit, legal costs, and medical bills exceeding your homeowners coverage limits.
• Your teenager causes a severe car accident that results in numerous injuries to other drivers and their passengers with costs that exceed your car insurance liability coverage.
• You write a negative business review on social media that results in a lawsuit.
• A houseguest falls from your second-story balcony and goes into a coma, later suing you for pain and suffering and extensive medical bills.
• Your spouse accidentally backs your car into the neighbor’s property causing extensive damage to their expensive equipment that exceeds your auto policy limits.

What is not covered by an umbrella policy?

Umbrella policies cover a wide range of incidents, In fact, unless your policy has a specific exclusion, you will likely be covered for injuries and damages to others that you are liable for. That said, there are things that your umbrella insurance usually will not cover including injuries that you or covered household members sustain or damage you cause to your own property. 

The following will not likely not be covered under your umbrella policy:

• Your own injuries and medical bills (usually covered by health insurance or personal injury protection)
• Damage done to your property or personal belongings (typically covered by your homeowners insurance)
• Criminal or illegal acts, or intentional injuries or damage caused by you or covered household members 
• Liability/losses related to business or professional actions (covered by business liability policy)
• Breach of contract or liability you agree to assume related to a signed or oral agreement 
• Damages caused by war or terrorism  
• Losses/damage to your home office (covered by business liability insurance)
• Home and auto coverage if they’re owned in other countries and subject to their legislation.

Do I need an umbrella policy?

You might start by asking yourself if you can afford to risk losing everything you own including the equity in your home, savings, and assets. Although not required by law, umbrella insurance is a must-have option if you are wealthy, own a large number of assets, are a potential target for a lawsuit, or engage in risky sports or activities. 

Umbrella insurance is designed to provide an added layer of coverage to protect you, your family, and your assets. Personal liability coverage typically found in a homeowners or auto policy may not be enough if a judgment is brought against you. This can leave you vulnerable to financial disaster. Your umbrella policy will help cover the remaining balance for damages and/or injuries that exceeds your personal liability insurance limits of your current policies.

You should consider having a minimum amount of liability insurance that will at the very least cover your net worth. Here is a list of reasons why you may want to consider an umbrella policy:

• You have a high net worth that includes equity, sizable savings, and/or other assets.
• You want to protect your future earnings.
• You are a property owner of primary and/or rental properties.
• You have a swimming pool, trampoline, or playground equipment on your property.
• You have a dog or large animals on your premises.
• Members of your household include teen, inexperienced, or high-risk drivers.
• You host parties and entertain guests frequently. 
• You are a high-profile personality and/or public figure. 
• You serve on the board or volunteer for a charitable organization.
• You’re concerned you may be a target when traveling out of the United States.
• You participate in dangerous sports or activities (surfing, skydiving, etc.).
• You are a coach in youth sports.
• You routinely post online reviews of companies and/or their products.
• Any risk factor that makes you an attractive target for a lawsuit.

How much do I need?

Start by totaling up your assets including the equity in your home, your personal savings, investment accounts, future income, and any other assets. If the total assets are greater than your existing liability policy limits, you may need a personal umbrella policy.

At the bare minimum you should have liability insurance coverage that protects your net worth. Check your existing home and auto insurance to check if you have enough to cover your net worth total. If not, you should purchase umbrella insurance to cover what you’re short. 

But it doesn’t stop there. It’s also wise to consider that if you are found at-fault in an accident and the other driver is, for example, a private physician unable to work, you may not be able to cover all the medical bills and other expenses if you are sued.

Although a broken arm and cracked ribs may result in a few thousand dollars of care, the hospital stay, court expenses, legal fees, and awards settlement could cost you several hundred thousand dollars and exceed your current home and auto liability policy limits. 

Although the majority of standard home policies may provide $100k-$300k in liability coverage, that may fall considerably short if you lose in court and owe $750,000 in a settlement. This gap or difference would be covered by umbrella insurance.

How do I buy an umbrella policy?

Most insurance companies that provide homeowners, rental, and auto insurance sell umbrella insurance. But before you can purchase personal umbrella coverage, most insurers will require that your existing home, renters, or car insurance policies have a minimum of liability insurance. In most cases, this means you may need a minimum existing coverage of $300k for bodily injury liability and $100k property damage liability before you buy an umbrella policy. 

Some insurers also require that you have these base coverages/policies with them before providing umbrella insurance. In these cases, you may want to consider bundling your policies to save money, but you should get quotes from insurers to compare rates as these doesn’t always guarantee the best price.

Once you decide the maximum amount of umbrella insurance you’ll need, you’ll want to see which insurers provide higher limits and coverages to meet your needs. For example, if you are a skier or entertain guests frequently at pool parties at your home, you’ll want to be sure these activities are covered. Your independent agent can help you shop around for the best rates on umbrella insurance.

How much does it cost?

Umbrella insurance can be expensive but in most cases is relatively inexpensive when you consider the protection it provides. This optional layer of protection acts as a supplement to your existing coverages. So, you will first need to purchase the maximum amounts of liability insurance coverage required in your existing policies. You’ll want to figure-in the increased premiums for these higher amounts. 

According to Kiplinger, umbrella insurance is typically sold in increments of $1 million and can cost you $150 to $350 per year. Additional increments of $1 million are roughly $100 per additional $1 million in coverage.

But premiums are based on certain factors and can vary from one insurer to another. Here are some of the factors that insurance companies take into account to determine umbrella insurance rates:

• Amount of umbrella insurance purchased.
• Your calculated net worth.
• Your age and history of insurance claims and risk of filing a claim.
• Location, age, security features, and construction of your home.
• The number of homes and vehicles you own.
• The number of household members you are insuring.
• Driving records and credit history of those covered. 
• Whether or not you are bundling your policies.

You may have calculated your increased liability amounts on your current policies and factored in what an umbrella supplement policy would cost and found it is not in your budget. In this case, you should check with your agent or current insurer about increasing your current liability limits. This will help provide you with more protection, although less than what an umbrella policy would offer.

What are the advantages and disadvantages of this insurance?

Like anything else in life, umbrella insurance has its pros and cons. But the advantages far outweigh the disadvantages when you factor in the peace of mind and relief you’ll feel knowing that your covered.

Advantages of an umbrella policy:

• Gives you additional liability coverage, court and legal costs beyond your current liability limits found in your home or auto policies.
• Protects you against claims and lawsuits not typically covered in existing liability coverage.
• Provides protection with higher coverage limits that are sold in increments of $1 million.
• Coverage is inexpensive when you factor in the amount of insurance provided.
• You are covered when traveling outside of the U.S.

Disadvantages of umbrella coverage:

• You will need to be covered with an existing home or auto policy to be eligible. 
• You will be required to increase your liability limits on your other policies.
• Your rates could increase if you are required to add additional liability insurance to your home or auto policies.