If the cost of an accident exceeds the liability coverage in your auto or homeowners insurance policy, you might find yourself footing the bill with your assets. An umbrella policy offers a safeguard against this worst-case scenario by stepping in to cover additional liability costs. Should you get this extra protection? Knowing how an umbrella policy works can help you decide if it’s the right fit for your situation.
What Is An Umbrella Policy?
An umbrella policy protects you from claims that otherwise wouldn’t be covered by your homeowners insurance or auto insurance.
If you’re buying a house or purchasing a vehicle, some level of liability insurance is usually required. But every insurance policy has a limit to what’s covered. An umbrella policy provides another level of protection. If a claim exceeds your current auto insurance or homeowners policy, the umbrella policy will kick in to protect your savings and assets from liability.
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How Does Umbrella Insurance Work?
An umbrella insurance policy fits on top of your existing auto or home insurance policy. In general, an umbrella policy includes protection for bodily injury liability, property damage liability and personal liability coverage.
For example, let’s say someone slips and hurts themselves in your home. It’s likely that your homeowners insurance will pay a claim for liability. However, it’s possible that the claim amount will exceed the limit of your homeowners insurance policy. Without an umbrella policy, you would be on the hook for additional damages, which could mean liquidating your life savings to cover the lawsuit damages.
If you have an umbrella policy, it will kick in after your homeowners insurance policy taps out. At that point, your umbrella policy can help protect your savings and assets by covering the costs of the claim. Depending on the situation, an umbrella policy could save you thousands of dollars.
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What Does An Umbrella Policy Cover And Not Cover?
The details of an umbrella policy can vary from insurer to insurer. But, in general, an umbrella policy may or may not provide coverage in the following situations:
What An Umbrella Policy Covers
Liability Examples | Umbrella Policy Coverage |
|---|---|
Damages to another person’s home or possessions | Yes |
Business losses | No |
Medical costs for other individuals | Yes |
Intentional vandalism | No |
| Lawsuit resulting from an accident | Yes |
| Charges of libel or slander | Yes |
| Damage or injuries caused by an excluded dog breed or excluded vehicle | No |
- Damage to another person’s property: If you cause damage to another person’s property, like a home or vehicle, an umbrella policy might help you pay for the damages after your homeowners or auto insurance policy limits are reached.
- Medical costs for other individuals: If you injure someone else, an umbrella policy could help you pay for the medical costs. For example, if someone gets hurt on your property and the costs exceed your homeowners insurance policy limits, your umbrella policy would kick in.
- Business losses: If you lose money in business, your insurer will not pick up the tab.
- Intentional vandalism: If you intentionally choose to vandalize someone’s property, that’s not covered by your umbrella policy.
- Lawsuit resulting from an accident: Lawsuits can get expensive quickly. If an accident leads to a lawsuit, your umbrella policy could help pay for your legal bills.
- Charges of libel or slander: If you are accused of libel or slander, your homeowners insurance policy likely won’t protect you. But your umbrella policy could help you pay to defend yourself in court.
- Damage or injuries caused by an excluded dog breed or vehicle: If a dog breed or vehicle is specifically excluded from your coverage, an umbrella policy won’t help you pay for the damage caused by either.
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Umbrella Policy Pros And Cons
Every financial decision has advantages and disadvantages. Below is a closer look at both sides.
Umbrella Insurance Policy Pros
Here’s a look at some of the benefits of an umbrella insurance policy.
- Protection for savings and personal assets: With an umbrella policy in place, you are better protected from loss. Ultimately, this means you are less likely to lose your life savings.
- Reasonable pricing for the potential payout: In general, an umbrella policy can be relatively affordable, especially when you consider the potential payout.
- Coverage for situations not covered by other insurance policies: An umbrella policy gives you more coverage for situations like libel or accident lawsuits, which offers more peace of mind for your finances.
Umbrella Insurance Policy Cons
Below is a look at the downsides of an umbrella insurance policy.
- Some personal injuries or property damage may not be covered: Even though most umbrella policies are fairly robust. It’s possible that you’ll wind up in in a situation that’s not covered.
- Having an additional payment each year: Adding another insurance policy to your life means adding another payment to your budget.
- Liability limits on what’s covered: An umbrella policy comes with limits attached.
How Much Does An Umbrella Insurance Policy Cost?
According to the Insurance Information Institute, umbrella coverage typically costs between $200 to $350 per year for $1 million in liability protection.
The exact cost of umbrella insurance can vary depending on your insurer, how much protection you buy and how much risk you pose to your insurer.
For instance, if you own a swimming pool or a trampoline, you’ll be seen as a higher risk and will pay more for coverage. Umbrella insurance is typically sold in $1 million increments up to $5 million – and the more coverage you choose, the more you’ll pay.
Umbrella Policy FAQs
You have questions about umbrella policies. We have answers.
Do I need an umbrella policy?
An umbrella policy is often a good idea for someone with significant savings or assets. Additionally, anyone who owns a dog and real estate investment properties should consider purchasing a policy.
Is umbrella insurance worth it?
If you have significant assets or your assets exceed the liability limits on your insurance policies, an umbrella policy may be a good idea. But if you have few assets and don’t have too many risks in your life, then an umbrella policy might not be necessary.
How do I buy an umbrella policy?
In most cases, you’ll need to purchase a minimum amount of liability insurance before you can buy an umbrella policy. For example, you’ll usually need to have at least $300,000 in liability insurance before you can add an umbrella policy to your homeowners insurance. Compare prices for umbrella policies across most major insurance companies to lock in the best price.
The Bottom Line: An Umbrella Policy Is Better For Some People Than Others
An umbrella policy offers additional protection for your savings and assets. If you want to take your coverage to the next level, look beyond your homeowners insurance policy to add an umbrella policy.
