What Is Umbrella Insurance, and Do You Need It?

Most insurance policies you might have, like car insurance or renters insurance, have built-in liability coverage. In a nutshell, liability insurance pays for your legal defense in third-party claims of bodily injury or property damage. It prevents you from paying out-of-pocket if you are found responsible for the claim.

But even though insurance can be a lifesaver in these situations, it doesn’t offer unlimited protection. Meaning your insurance company will only pay up to a certain amount, called the policy limit, in the event of a claim (like an at-fault car accident, for example).

So, what happens if you need more liability insurance than your standard policies provide? This is where umbrella insurance comes into play.

In this guide, we’ll explain the ins and outs of umbrella insurance — what it covers, how much it costs, who needs it, and where you can get it.

Umbrella insurance is a type of insurance that provides additional liability coverage above and beyond what your standard insurance policies offer if you get sued. The main purpose of umbrella insurance is to protect your assets in personal liability claims where you could be held financially responsible.

For example, imagine that you cause a serious car accident with multiple injured drivers. The liability limits of your basic auto insurance policy may not provide enough coverage to compensate each driver for their medical bills.

In this case, an umbrella insurance policy would provide more coverage and reduce the amount of money you would have to pay out-of-pocket. Without umbrella insurance, you would be responsible for paying the difference between your insurance policy’s limit and the total cost of the medical expenses using your own money.

Every umbrella insurance policy is slightly different. However, all policies will protect you financially in liability claims, including:

• Bodily injury claims.
• Property damage claims.
• Personal liability claims.
• Slander and libel claims.

Specifically, umbrella insurance will provide compensation for the following costs:

• Your legal defense and court costs.
• A settlement with other parties.
• A judgment with other parties.

Although liability insurance is typically thought of in relation to auto, home, or renters insurance, you can apply umbrella insurance to any personal liability claim you might face. For example, let’s say you leave a scathing review after a poor hotel experience and the hotel sues you for defamation. You could use your umbrella insurance policy to pay for your legal fees.

Another thing to know about umbrella insurance is that it covers you anywhere in the world. So, if you accidentally hit a pedestrian while driving a Vespa in Italy, your umbrella insurance policy would apply if the pedestrian sued you for their medical bills and pain and suffering.

Umbrella insurance has a few limitations. Here are some things that umbrella insurance won’t cover:

• Your own injuries or property damage.
• Liability claims related to your business.
• Liability claims related to a breach of contract.
• Intentional acts and crime.

Before you purchase an umbrella insurance policy, it’s a good idea to review the policy details with an agent, as every policy is a little different. For instance, some umbrella insurance policies exclude coverage for boat liability claims, unless your boat is insured.

If you’re in the market for additional liability insurance, you might have come across a policy called excess liability insurance. Although umbrella insurance and excess liability insurance are sometimes used interchangeably, they are actually two separate policies.

Excess liability insurance increases the liability coverage limits on insurance policies you already have. It’s usually sold as an endorsement.

For instance, imagine that you have $500,000 in liability insurance on your homeowner’s insurance policy. After you install a pool, you decide that you need more coverage. In this case, you could purchase excess liability insurance and raise your coverage limit to $1 million.

Unlike umbrella insurance, however, excess liability insurance only applies to the policy you purchase it for. If you get excess liability insurance on your renters insurance policy, it doesn’t apply to your auto or home insurance.

In addition, excess liability insurance does not cover non-insurance claims. For example, if you or one of your family members was sued for libel or slander, excess liability insurance would not provide any coverage for your legal fees.

Read more: Renters Liability Insurance: What It Covers, What It Costs, and Who Needs It

Because umbrella insurance is designed to protect your personal assets in the event of a personal liability claim, the right amount of coverage is different for everyone. Ultimately, it depends on your net worth and the assets that could be at risk if you were found responsible for a liability claim.

To calculate how much umbrella coverage you should have, consider the following:

• The physical assets you own, like cars and houses.
• The amount of money in your savings account.
• The amount of money in your investment portfolio.

As a general rule of thumb, you should purchase enough umbrella insurance to cover your net worth in full. This will ensure that your personal assets are not at risk if you get sued.

Unlike home or auto insurance, umbrella insurance policies come with very high coverage limits. Most insurance carriers sell umbrella insurance with $1 million to $5 million in coverage.

Read more: Net Worth Is Your Most Vital Financial Stat — Do You Know Yours?

Remember, even if you don’t have an exceptionally high net worth, your physical and financial assets can be seized in court if you get sued and don’t have enough money to repay the plaintiff (the person or company suing you).

It sounds like umbrella insurance would be expensive, but most policies are more affordable than you might imagine. Most insurance companies estimate that a $1 million umbrella insurance policy costs between $150 to $300 per year, with higher premiums for higher coverage limits.

The cost of umbrella insurance depends on a few different factors, though. Here are some of the biggest ones:

• Your insurance company.
• The amount of coverage you purchase.
• Your unique risk factors.

If you’re on the fence about getting umbrella insurance, the extra cost probably won’t raise your insurance premiums by too much. But keep in mind that the more risk you face, the more expensive your premium will be. Certain situations, like keeping firearms in your house, can have a bigger impact on the cost of your coverage.

Umbrella insurance is never a legal requirement, but it can be beneficial for many people. However, you should strongly consider getting umbrella insurance if you have a high net worth or are at an increased risk of getting sued.

If you fall into one of the categories below, you can potentially benefit from umbrella insurance:

• You own a high-value home.
• You have a significant financial net worth.
• You frequently host parties at your home.
• You have a pool, trampoline, dog, or other things in your home that could cause injury to others.
• You are concerned about getting sued while traveling internationally.
• You are a landlord or own rental properties.

Umbrella insurance has a number of benefits, but it also has a few downsides. Here are several things to consider while you’re researching this type of insurance.

Pros

Provides Generous Liability Protection

The biggest perk of umbrella insurance is that it increases the amount of liability insurance you carry. Depending on your lifestyle or your job, umbrella insurance can offer extra peace of mind in case you face an expensive third-party claim or lawsuit.

Covers Losses Excluded from Other Policies

While your property insurance and car insurance policies provide liability insurance, some losses are excluded. Umbrella insurance can fill gaps in your coverage, as it often covers things like slander, libel, and even false arrest.

Most Policies Are Very Affordable

Umbrella insurance premiums are generally inexpensive in comparison to the high amount of coverage you get. The cost is mostly based on the coverage limits you choose.

Cons

Only Available Once You Max Out the Limits of Your Current Policy

You can only get umbrella insurance if you already have the highest liability coverage limit your insurer provides. Depending on your insurance company, that limit is probably at least $1 million.

Doesn’t Provide Coverage for Your Own Losses

A major downside of umbrella insurance is that it won’t cover your own losses, like property damage or bodily injury after a car accident. It strictly applies to damages that you inflict (or are accused of inflicting) upon others.

Best Suited for High Net Worth Individuals

Realistically, umbrella insurance is only necessary for individuals with a high net worth. People with fewer assets and those who face moderate liability probably won’t benefit as much from umbrella insurance.

Most major insurance companies sell umbrella insurance policies. Some offer quotes online, while others require you to call an agent. However, every umbrella insurance policy is different, so it’s important to compare a few policies before you purchase one.

For example, most insurance companies sell umbrella insurance policies with coverage limits of $1 million to $5 million, but you can find policies with higher limits. In addition, certain policies may have exclusions. You’ll want to make sure the policy will cover you sufficiently based on your lifestyle and the unique risks you face.

Here are some reputable insurance companies that sell umbrella insurance policies. 

Travelers

Travelers’ umbrella insurance policy provides coverage limits ranging from $1 million to $10 million, which can be used to protect a variety of assets, including boats, residential properties, and cars. While umbrella insurance is typically pretty affordable to begin with, Travelers’ website mentions that you can potentially qualify for an even lower rate by bundling umbrella insurance with another policy. To find out about the company’s minimum coverage requirements, I recommend contacting an agent in your state.

Allstate

With an umbrella insurance policy from Allstate, you can get between $1 million and $5 million in additional liability coverage that protects you anywhere in the world. To get an umbrella policy, you must already have an auto or home insurance policy from Allstate, and meet the minimum coverage requirements. You are eligible for an umbrella insurance policy if you have at least $300,000 in home insurance liability coverage or $250,000/$500,000/$100,000 in auto insurance liability coverage.

Geico

Geico sells umbrella insurance in every state except New York and New Hampshire. You can add $1 million in coverage to your existing Geico home or auto insurance policy, with higher coverage limits available for some customers. In addition, Geico offers online quotes for umbrella insurance, which makes it easy to see how much you’ll pay. To get umbrella insurance, the minimum liability coverage limits for car insurance are $300,000/$300,000/$100,000 or $250,000/$500,000/$100,000, and $300,000 for home insurance liability coverage.

What Is Personal Umbrella Insurance?

Personal umbrella insurance is an optional policy that provides higher coverage limits for personal liability once you’ve exhausted the limits of your base policy. Umbrella insurance is available from many insurance companies, and can be added to various policies, including auto, home, boat, renters, and motorcycle insurance.

What Is Commercial Umbrella Insurance?

Commercial umbrella insurance is an umbrella insurance policy for businesses. Rather than protecting the policyholder from personal liability claims, commercial umbrella insurance protects the business from third-party lawsuits. Specifically, commercial umbrella insurance will pay for a business’s legal fees and a settlement in the event of lawsuits related to things like customer injury, libel or slander, and accidents in a business-owned vehicle.

How Much Umbrella Insurance Do I Need?

Your personal umbrella insurance coverage limit should be based on your net worth. Start by calculating your assets that could be at risk in the event of an expensive liability claim. This includes things like real estate, cars, investments, and savings. It’s a good idea to choose an umbrella insurance coverage limit that matches or slightly exceeds your total net worth. If you accumulate new assets, make sure to update your policy limits accordingly.

At this point, you might be asking yourself, “Is umbrella insurance worth it?” The answer is: It depends. Every person has different insurance needs, and that goes for umbrella insurance, as well.

If you have a high net worth or have an increased risk of getting sued, having umbrella insurance can provide an extra layer of protection and added peace of mind. Even if you don’t have a substantial savings account or multiple real estate properties, having umbrella insurance can still be useful.

Personal liability claims happen unexpectedly, whether your normally friendly dog bites a delivery driver, you hit another skier on the slopes, or you cause a major pileup on the highway. Because most umbrella insurance policies are budget friendly, it can be a good thing to add to your insurance portfolio.

Read more:

• How Much Insurance Should You Have?
• Insurance 101: 10 Types of Insurance Everyone Under 30 Should Understand