Do You Need an Umbrella Policy?

By Shannon Ireland

The question of whether to purchase an umbrella insurance policy basically comes down to you, your assets and your inclination to plan for the unforeseen. That makes it different from other types of coverage.

Homeowners insurance? Your lender likely requires it as a condition of your mortgage. Auto insurance? Every state but New Hampshire requires at least liability insurance - and even the Granite State mandates that you demonstrate financial responsibility (in case of a wreck).

But an umbrella policy? No one’s going to make you buy one. It’s your decision. Here’s some advice on how you can make that choice.

What is an umbrella insurance policy?

First things first: an umbrella policy is designed to provide the purchaser with additional liability coverage beyond the limits set on existing home, auto, renters, or other policies.

Simply put, umbrella insurance protects your assets - such as your savings, retirement fund, investments, future earnings and your home - from lawsuits or major claims resulting from an accident you cause or an incident on your property in which someone is injured. Umbrella policies can also protect you in libel or slander lawsuits.

How does an umbrella insurance policy work?

An umbrella policy kicks in after the liability portion of an existing insurance policy has been exhausted. For example, if someone is injured while on your property and they need extensive medical treatments that exceed the maximum limit of your homeowners policy, an umbrella policy would pick up the slack, up to your coverage limits, once you exceed the limits of your homeowners policy.

Because umbrella policies are only able to be used when the liability limits of existing policies have been exceeded, many carriers have requirements before you're eligible to purchase the coverage.

For example, most providers require you to carry $300,000 in liability coverage on your homeowners insurance policy and $250,000 of liability protection on an auto insurance policy before allowing you to purchase an additional $1 million or $2 million in umbrella coverage, according to the Insurance Information Institute (III).

What’s the cost? According to the III, you can expect to pay between $150 and $300 per year for $1 million in umbrella coverage. Coverage is sold in $1-million increments, generally up to $5 million. The second $1 million of umbrella protection generally costs about $75 per year, and you’ll pay about $50 per year for each $1 million after that.

Who should invest in umbrella insurance?

Anyone who owns a home and has a retirement fund should invest in umbrella insurance. But so should others. Keep in mind that you may have more to lose than you think, because your home, savings, retirement funds, future earnings and any investments are at risk if you're sued for a large sum of money.

Umbrella policies also are a wise choice for those who own small businesses, have a trampoline or pool in the backyard, or often blog or post on social media about controversial subjects and could be sued for libel or slander.

Bottom line, if you participate in any activity or have possessions that increase your liability risks, it's a best practice to purchase an umbrella policy to protect yourself from the unknown.

Consider the following scenarios:

• You cause a fatal car crash and your blood alcohol content is over the legal limit. The resulting lawsuit could quickly exceed the liability limits of a standard auto insurance policy, leaving you to cover the difference. Trying to scrape together enough money to pay damages for a lawsuit with this level of severity could leave you selling your home and/or business, as well as emptying out your savings and retirement funds. However, if you've purchased an umbrella policy, those assets could be protected.
• You're hosting a party and your balcony collapses and injures or kills multiple people. Paying for medical and/or funeral expenses would add up at an alarming rate and blow through your homeowners insurance liability limit.
• You're driving in a foreign country. The rules of the road are different, and you get confused and overwhelmed and cause a serious accident such as a multiple car pile-up. Having an umbrella insurance policy can ensure that your assets are safe (although you must make sure it will remain in force outside the U.S.).

The vast majority of umbrella insurance payouts are for wrecks, but homeowners and other risks can be equally as worrisome and costly.

Do you need an umbrella policy? Again, it’s up to you. But if you want to protect your assets against more potential problems, you may find umbrella insurance to be a relatively inexpensive hedge against financial ruin in the event of a tragedy.

Related:

• Insuring Your Home Against Fire Damage
• Why Did My Home Insurance Premium Go Up?
• How Credit History Affects Home Insurance Premiums

Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.

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