About ten years ago, my wife got into a car accident and the driver of the other car made a very large claim against us and our auto insurer. The claim amount initially exceeded the liability limit of our policy. We were notified by our insurer that we should consider hiring a lawyer to fight the amount of the claim above the policy limits. Ultimately, the claimant settled with our insurer for an amount within our liability amount, otherwise we would have needed to get directly involved legally.
After this unsettling incident, we decided to increase the protection of our assets with an umbrella insurance policy. Umbrella insurance provides an extra layer of protection on top of your existing insurance policies (like auto or home insurance). It helps cover costs if you’re sued and the damages exceed the limits of those other policies, protecting your assets.
If you are interested in learning when you may need an umbrella policy and how to determine coverage needs, please read on.
Do I need umbrella insurance?
You should consider purchasing umbrella insurance when your assets exceed the liability limits of your current homeowner’s, auto, or other insurance policies. Here’s when having an umbrella insurance policy becomes important:
You have significant assets to protect
If you have savings, investments, property, or other valuable assets, umbrella insurance helps protect them in case you’re sued and your primary insurance coverage isn’t enough. Standard homeowner’s and auto insurance policies often have liability limits up to $500,000, but your policy may have a lower amount. If your total assets (including savings, investments, and property) are greater than this amount, an umbrella policy can provide crucial additional protection.
Your lifestyle involves higher risk activities
You should consider umbrella insurance if you:
- Drive frequently or have teen drivers.
- Host parties or guests often at your home (increased liability).
- Own a swimming pool, trampoline, or dog (especially certain breeds).
- Own rental properties or are a landlord.
- Engage in activities with higher liability risks, such as volunteering, coaching youth sports, or being on a nonprofit board.
You want broader liability protection
Umbrella insurance can cover:
- Legal fees if you’re sued.
- Claims not covered by other policies, like slander, libel, or false arrest.
- Accidents you cause while traveling internationally.
- Incidents involving rental properties.
Legal and medical costs can be exorbitant. Even if you have primary liability coverage, it might not be enough to cover all the expenses in a significant lawsuit. An umbrella policy acts as a financial safety net in such situations, preventing you from having to liquidate assets or significantly impact your future financial security.
How much coverage do I need and what will it cost?
Umbrella insurance is often surprisingly affordable, especially considering the substantial coverage it provides. Costs can vary based on factors like your location, the amount of coverage you choose ($1 million to $5 million or more), your risk profile (number of vehicles, properties, etc.), and your underlying policy limits.
- A $1 million umbrella policy can often range from $150 to $300 per year.
- Increasing the coverage to $2 million might cost around $300 to $500 annually.
- Higher limits, such as $5 million, could range from $500 to $1,000 per year.
Many insurance companies offer discounts if you bundle your umbrella policy with your existing home and auto insurance.
To determine the ideal amount for your specific needs, it’s best to:
- Calculate your net worth.
- Assess your lifestyle and potential liability risks.
- Review the liability limits of your current homeowners and auto insurance policies.
- Consult with an insurance professional. They can provide personalized advice based on your unique circumstances and help you choose the right amount of coverage to protect your financial well-being.
In summary, you should consider buying umbrella insurance when you have significant assets to protect or when your lifestyle or circumstances expose you to a higher risk of liability claims that could exceed the limits of your standard insurance policies. It provides valuable peace of mind and financial security against potentially devastating lawsuits. To learn more about umbrella insurance and your coverage options, please download this information brief.