It’s tough since there’s no universal answer. But hopefully you’ve landed on the magic number that will protect you if there comes a time when one of those “what if” situations actually happens.
It’s possible that you or someone in your household cause a lot of damage or major injuries, even accidentally. And there’s a chance that you could be on the hook for thousands more than your insurance policies cover.
That’s where umbrella insurance comes in handy. An umbrella policy offers you additional insurance beyond what your auto and homeowners insurance policies cover. And it’s surprisingly affordable.
What is umbrella insurance?
Even though your auto, homeowners, or renters insurance policy will come with liability coverage, that might not be enough during a major insurance claim or a lawsuit. This could lead to a huge personal finance loss.
Umbrella insurance acts as a shield against claims that go beyond your existing policy’s limits. If a lawsuit spills over your insurance policy’s limits, an umbrella policy shields you from the remaining fallout.
How does umbrella insurance work?
Let’s say you were driving distracted and caused an accident. This resulted in multiple injuries to all the passengers in another car. By the time the dust settles, you might have inadvertently caused hundreds of thousands of dollars worth of damage.
If you live in Pennsylvania, for example, and only have the minimum auto coverage, your insurance policy will only pay out a maximum of $30,000 per accident towards bodily injury. This leaves you on the hook for the rest.
Depending on where you live and where you keep your savings, you may have to drain your retirement accounts or even sell your home to pay off part of the bill.
In some cases, your future earnings can even be garnished. It can empty you of every last cent you have, and then some. It’s not a scenario anyone wants to think of.
A scenario like this — where you have to pay out beyond the limits of what your insurance policy covers — is exactly where an umbrella insurance policy can save the day.
What does umbrella insurance cover?
Since an umbrella insurance policy kicks in after you’ve exhausted your current policy, you get peace of mind with this extra coverage.
Generally, an umbrella policy covers all of the same things as your existing homeowners, renters, or auto insurance, such as property damage, bodily injury, legal costs, and landlord liability if you rent out property that you own for extra cash.
Let’s say a fire breaks out and damages your property along with your neighbor’s property. They’ve also sustained injuries because of it. You might have to pay for any repairs to your neighbor’s home and pay for any injury claims. If you don’t have enough coverage with your homeowners insurance, an umbrella policy would cover this.
Additionally, most umbrella insurance policies also offer extra coverage against personal claims, such as libel, slander, invasion of privacy, and vandalism.
What does umbrella insurance not cover?
Umbrella insurance does not generally cover injuries that you yourself sustain or damage to your own property. It also generally doesn’t cover business losses, even if you have a home-based business — that requires business liability insurance.
Umbrella insurance usually won’t cover flood damage (that’s a separate insurance policy) or any contracts you sign (such as if you agree to be held responsible for injuries that workers sustain while remodeling your kitchen).
How do I get an umbrella policy?
You’ll generally get an umbrella policy from the same company where you have your auto, homeowners, and/or renters insurance.
You can buy policies in increments of millions of dollars, and it’s essentially considered an add-on insurance product. It’s pretty rare for companies to sell these as stand-alone policies.
Some companies may require you to have both your homeowners/renters and your auto insurance with the same company, if applicable. Other companies only require you to have one of these policies with them, but will still cover excess claims from another policy.
If this is the case, make sure you double-check with the insurance company offering the umbrella policy so you know exactly what’s covered and what’s not. In general, however, it’s easier to keep all of your policies with the same insurance company if possible. It simplifies things, and you can usually qualify for a bundling discount.
Most insurance companies will require that you have a minimum amount of auto, homeowners, or renters insurance before you can buy an umbrella insurance policy. This may be a higher amount than the minimum requirement for auto insurance in your state; it varies by insurer.
How much does umbrella insurance cost?
One of the best things about umbrella insurance is that it’s surprisingly cheap.
According to the Insurance Information Institute, an umbrella insurance policy offering a million dollars’ worth of extra coverage only costs $150 – $300 extra per year, and each additional million dollars’ worth of coverage after that can be even cheaper.
Do I need an umbrella policy?
Umbrella insurance is particularly recommended for people who are:
- Very risk-averse and want to sleep better at night
- Can’t afford to live on a partial income (such as if your wages are garnished in a lawsuit)
- Have high net worth
There are things you might not even think of that could classify you as having a “risky” lifestyle. Things like owning large dogs or even having a trampoline in your backyard, are all “risky” activities that could result in big-ticket lawsuits.
If you’d like reassurance for a relatively low cost, then umbrella insurance might be for you.
How much umbrella insurance do I need?
Unfortunately, there is no hard and fast answer as to how much umbrella insurance you need. It depends on your financial situation and how much peace of mind you want.
When figuring out how much umbrella insurance you need, start by calculating your total net worth. At the bare minimum, your insurance should at least equal that number.
To calculate your net worth, tally up all your assets and then subtract your debts from that number. Your assets can include your retirement accounts, chequing and savings accounts, real estate, etc.
There will always be a chance that you could lose more than that in a lawsuit. But since umbrella insurance is fairly inexpensive, there’s isn’t a huge downside to buying this coverage.
That’s the best part about umbrella insurance, after all — you can feel protected, and for a surprisingly good price that you can afford.