What is umbrella insurance?
Umbrella insurance is a kind of excess liability insurance, giving you extra coverage beyond that provided by your auto or homeowners policy. So, do you need it, and how exactly does it work?
Liability insurance protects you and your finances if you’re responsible for damaging property or injuring others, such as in a serious car accident. So, what if the costs exceed the coverage provided by this insurance? Here’s where you need umbrella insurance to protect you from selling assets or borrowing to pay for a lawsuit judgment.
How does umbrella insurance work?
In simple terms, umbrella insurance starts covering you when you reach the liability limits of your standard insurance policy, such as the cover for your home or car.
For example, imagine one day you or one of your insured family members puts the car into drive instead of reverse while leaving a convenience store parking lot. You’d be surprised how often accidents like this happen, where quite extensive damage is done to buildings and property. Naturally, your auto insurance will pay initially, but if costs run higher than the limits set by your standard policy, then umbrella insurance is there to protect you.
The key point is that umbrella insurance exists to fill the gap left by ordinary insurance policies when a problem gets more serious and financial implications grow.
What does umbrella insurance cover?
As we’ve said, umbrella insurance covers you above and beyond your standard policies, usually including your spouse and children.
Here’s a more detailed list of the coverage you can expect:
Bodily injury to other people
Damage to other people’s property
Legal costs to defend you in lawsuits related to the above
Lawsuits, including defamation, libel, slander and invasion of privacy
Incidents that happen outside the US
Your umbrella insurance can also protect you from problems that are not covered by standard auto and homeowner policies at all, such as:
False arrest, detention or imprisonment
Invasion of privacy
Naturally, some things are not covered by umbrella insurance, and these include:
Criminal acts by you or your family
Written and oral contracts
Intentional acts or injury caused by you
Damage due to nuclear radiation, war or terrorism
How much is umbrella insurance?
According to a report by ACE Private Risk Services, which sells high net-worth personal insurance, umbrella insurance costs $383 a year for $1 million of cover, on average. When you request a quote, your insurer will typically get your information, including where you live, your credit history, your driving record, and the likely risk of you filing an umbrella insurance claim. The answers will help set the insurance rate you are then charged per year.
The table shows the average cost rising from $1 million of cover.
|Umbrella insurance limit||Annual cost of umbrella insurance|
Source: ACE Private Risk Services
Do you need umbrella insurance?
This depends on the extent of your assets.
Below are some typical circumstances where it could pay to invest in the extra cover:
You have a high public profile
You employ household staff
You own dogs or horses
You serve on a charitable board
You have a swimming pool or trampoline
You host large house parties
You manage a family trust
Just how much umbrella insurance you need depends on the value of your assets and potential future income loss. You need to cover your net worth at least, and in a major lawsuit, your future income could be at risk.
The bottom line
Long and complex legal proceedings can be extremely stressful and damaging. With umbrella insurance, you can protect the assets you’ve worked hard to build up.
As your situation changes over the years, it’s a good idea to review your policy regularly to ensure it matches your needs. Also, consider talking to a professional financial advisor who will be well-equipped to steer you in the right direction regarding umbrella insurance.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.