What is Umbrella Insurance?
Umbrella Insurance is a supplement to basic liability policies that’s not confined to one specific policy. It’s designed to protect you from major claims and lawsuits, acting as additional protection for your basic insurance policies, including auto, home, renters, boat, and motorcycle. It’s relatively inexpensive as well, according to the Insurance Information Institute, $1 million in coverage costs about $150 - $300 annually.
Why Should I Purchase Umbrella Insurance?
It protects you from an unseen event in which you may be liable. Consider these scenarios: Your son blinds someone with a BB gun. Your daughter rear-ends a car, causing serious injuries to its driver. A neighbor injures himself jumping into your pool. Your teenager’s friend drinks liquor at your house and then injures someone in a car accident. You serve on the board of a non-profit that fails to pay for its tax bill. According to the Chicago Tribune, in all of these scenarios, you’d be a candidate for umbrella insurance.
Umbrella Insurance covers others’ injury treatment and funeral costs; others’ property damage; lawsuits involving slander, libel, defamation of character; injuries or damages suffered by a tenant if you’re a landlord; and legal defense costs for these scenarios. It doesn’t cover your injuries or damages to your personal belongings; others’ injuries or property damage that your business is liable for; intentional criminal acts; and it likely won’t cover you while using recreational vehicles like 4-wheelers or Jet-Skis.
Okay, so maybe you don’t think these unlikely events will happen to you. Fair enough. But damages and injuries in an auto accident can often exceed policy limits, and according to Time Magazine, more than 80% of umbrella losses are auto-related. If you’re a driver with many assets, you want to protect those assets from exposure. If you’re a commuter or carpooler and you’re liable for an accident, the more people you drive, the higher your risk for a costlier accident. If you participate in a ride-sharing program such as Uber or Lyft, you may be exposing yourself to additional risk. If you have a dog, particularly one that’s a “blacklisted” breed, you may be exposed to a higher risk.
All in all, there’s a lot of different scenarios, both anticipated and unseen, that could expose your assets to lawsuits. Umbrella Insurance is designed to stop an accident from becoming a life-changing event financially.
How Much Umbrella Insurance Do I Need?
Some financial advisors recommend getting one to two times their exposed net worth, “that way you are not only shielding your money, but ensuring that the insurer will mount an aggressive defense.”
You’ll want to calculate the totality of your assets–your house, retirement savings, bank accounts, your future income and earning potential, etc.–and go from there. As mentioned earlier, coverages generally start at $1 million. Per the III, the next million in coverage will cost about $75 annually and $50 annually for every million dollars in coverage you want to add after that. Additionally, “because the personal umbrella policy goes into effect after the underlying coverage is exhausted, there are certain limits that usually must be met to purchase this coverage. Most insurers will want you to have about $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your homeowners policy before selling you an umbrella liability policy for $1 million of additional coverage.”
Your current insurance carrier may offer umbrella coverage, which also offers you the opportunity to bundle coverages and save on premiums. While you may be comfortable with your current coverages and liability limits, it doesn’t hurt to calculate your net worth and speak with your carrier about either raising your policy limits or purchasing umbrella insurance. It’s hopefully something you’ll never need to use, but may offer you security and peace of mind.