Umbrella Insurance: How It Works, What It Covers, and Who Needs It
Your standard auto insurance policy probably has liability limits — the maximum amount your insurance provider will pay to cover damages when you cause an accident. If the value of damages from an accident exceeds those limits, you are responsible for paying the difference. Your personal assets could be at risk.
Umbrella insurance is designed to offer extra protection and keep your assets safe, even if accident damages are higher than your standard liability limits. In this guide, learn what exactly umbrella liability insurance covers, how it works, who needs it, and what it costs.
What Is Umbrella Insurance and Why Does It Matter?
Umbrella insurance is optional insurance that provides additional liability coverage that extends beyond the limits of your other insurance policies. You can buy umbrella coverage for homeowners insurance or auto insurance.
With car insurance, your umbrella policy will kick in if you exceed the liability limits of your standard auto policy. Without umbrella coverage, you would have to pay that additional money out of pocket. But if you have an umbrella insurance policy, it will activate after you reach your regular liability limits and cover the remaining balance.
What Does Umbrella Insurance Cover?
It’s important to understand that umbrella insurance does not replace regular personal liability insurance. It also does not cover the cost of your injuries or property damage from an accident. Generally, umbrella liability insurance covers:
- Bodily injury liability: The cost of medical care, lost wages, and pain and suffering when other parties sustain injuries in an accident
- Property damage liability: The cost of repairing or replacing someone else’s damaged property in an accident
- Legal defense costs: The cost of mounting your legal defense if you’re sued after an accident
What Umbrella Insurance Typically Doesn’t Cover
While personal umbrella policies can be very useful in providing additional coverage for some things, they don’t cover everything. You'll need other insurance coverage for potential costs such as:
- Personal injuries to the policyholder
- Damage to your own property
- Business-related claims
- Intentional acts or criminal behavior
How Umbrella Insurance Works
For example, say your regular liability policy limits are $25,000 for bodily injury liability of one person, $50,000 for bodily injury liability per accident, and $10,000 for personal property damage liability.
If you cause an accident that leads to $100,000 in bodily injury for the other driver and their passenger, your regular liability coverage will only pay out $50,000 based on your insurance limits. That leaves an additional $50,000 for you to cover after insurance.
That’s when your umbrella insurance will kick in to pay that remaining $50,000 if you have coverage. Otherwise, you may need to pay that amount out of pocket.
Who Needs Umbrella Insurance?
Umbrella insurance is completely optional, so it’s up to you to decide whether you need it. Generally, umbrella policies are beneficial for people who have significant financial assets or who are at high risk for lawsuits. If your financial assets are worth more than your liability policy limits, it might be wise to purchase umbrella insurance.
You also have to consider how likely you are to be sued. A lawsuit from another driver in a car accident is just one possibility. People who have swimming pools, own rental properties, or have large animals are also at higher risk of lawsuits and may benefit from umbrella insurance.
How Much Umbrella Insurance Do You Need?
Choose an umbrella insurance policy that can cover the value of your assets. For example, if your net worth is $750,000, a $1 million policy would be more than enough. That way, even if you get sued and need to use your umbrella coverage, you won’t have to worry about losing any of your assets.
What Does Umbrella Insurance Cost?
The price of your umbrella insurance premiums will depend on factors like:
- The coverage amount you choose
- Your location
- Your personal risk profile
- The insurance company you choose
For $1 million in coverage, the average household with one home, two cars, and two drivers will pay $383 per year. So you can get a lot of umbrella insurance at a relatively low cost. Your policy will get more expensive if your household includes young drivers, additional vehicles, or more homes.
Compare Liability Coverage To Stay Fully Protected
Choosing the right liability coverage will ensure you don’t have to worry about paying for liability damages out of pocket. If your current policy limits seem too low, consider selecting a new policy with higher limits or adding umbrella coverage.
Either way, make sure you compare your insurance options to get the best deal on the coverage you choose. The good news is that you don’t need to request quotes from each insurance provider individually. Instead, use EverQuote to get a personalized comparison of your options in just a few minutes.
Get your free custom insurance quotes today.