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What Is Umbrella Insurance And Do You Need It?

By David Bakke

do i need umbrella insuranceI have never professed to know everything there is to know about money and finances, and I am reminded of that on a fairly regular basis. Recently, I came across the term “umbrella insurance” and realized that I basically knew nothing about it. I had heard of it before but really had no idea what it was, what it covered, and most importantly, not knowing if I should have it. We typically think of buying and paying for insurance as a nuisance until it really comes in need. I know that a lot of people have had horror stories with rejected insurance claims and bad experiences with adjusters and agents, but for the most part, insurance DOES save you from big financial disaster. Umbrella insurance is not a “necessity” when it comes to your portfolio of insurance, but for some people, it might make sense to have it. The following is a synopsis of what I found out:

What is it?

By definition, umbrella insurance is a liability-type policy that will protect the assets and future income of the policy holder above and beyond the standard limits on their primary policies. The term “umbrella” refers to how the policy covers one’s assets more broadly than their primary coverage. At the risk of sounding ignorant, I had to read that three or of our times to myself before it even began to make sense, and even then I was still a little confused.

So, after I really dug into this thing, here is a layman’s definition for umbrella insurance. The most basic definition that I could come up with for it is “lawsuit insurance.”

What Does It Cover?

What an umbrella insurance policy will do is give you added protection against lawsuits that arise from damage to someone else’s property or injuries from an accident. It also covers a variety of other things including false claims, false arrest, invasion of privacy and so on. There are some things that it won’t cover, though, so get the details before moving forward.

It can also provide what is considered “fill in the gap” coverage, where some of you other policies may not be adequate. Policies are usually written in increments of one million dollars.

What Does It Cost?

Of course, the actual costs of the policy will vary depending on your needs and so forth, but it looks like a ball park figure for a $1 million dollar policy for two people, cars, and a house will run you about $200-$250 annually. I was quoted $240 by my insurance agent. This works out to about ten bucks a month per person per year. In the grand scheme of things, it is not that expensive at all.

What Is It Really For?

Twenty years ago, I would have said that umbrella insurance would be better called “paranoia insurance.” What this insurance covers you on are catastrophic accident type things. A tree on your property falls down on your neighbor’s house in a storm. You dog bites somebody. You are found to be at-fault in a major car accident.

However, in this lawsuit-happy society that we live in today, getting sued at some point in your life is less about paranoia and more about reality. I’m not saying that the percentages say that you will be sued at some point it your life; lawsuits are just much more prevalent these days. Even if some idiot out there decides to sue you for some ridiculous reason, remember, you still have to defend yourself. An umbrella insurance policy would help defray the costs of this defense.

Do You Need It?

This is really a personal choice that you have to make for yourself, but you can base it on some facts. The biggest thing that I would look at is your own net worth. If your overall net worth is less than one million dollars, is there any sense in covering yourself for an additional million over and above your regular policies? I would think not.

Another factor to consider is your daily routine and lifestyle. Does your job, hobbies, or your place of residence put you at any increased risk for a catastrophe?

Lastly, consider what level of peace of mind you feel that you need? If this is important to you, then maybe you’d want to consider getting a policy.

Personally, at this point in my life, I doubt that an umbrella insurance policy would be right for me. My net worth is not at a level where having one would be prudent, and I just don’t think I have some of the liability factors needed to warrant a policy. If I had a pool in the backyard, or a small business doing something like construction, or teenaged children, I might consider it.

But, at least it’s good to know what the policy is and what it covers. What are your thoughts? Do you think it’s right for you?

(photo credit: protectorr)

David Bakke
David started his own personal finance blog, YourFinances101, in June of 2009 and published his first book on ways to save more and spend less called "Don't Be A Mule..." Since then he has been a regular contributor for Money Crashers. He lives just outside Atlanta, GA and most all of his free time is taken up by his amazing three year old son, Nicholas.

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  • Patrick

    Even if your net worth doesn’t make it “worth” it now, can’t lawsuits go against future income? If that’s the case, then it may very well be worth it, especially when one considers how inexpensive it is in the grand scheme of things.

  • David/moneycrashers


    Great point, and one I failed to take into account during the writing of the article. As I said, this was all new to me, so I’d have to say I’d consult an attorney on that question.

    If it is true, then it makes an even stronger case for getting it.

    Thanks for your valuable feedback!

    • Patrick

      It’s new to me as well. I’m going off of the line “By definition, umbrella insurance is a liability-type policy that will protect the assets and future income of the policy holder above and beyond the standard limits on their primary policies.” that you wrote and then the line “The biggest thing that I would look at is your own net worth. If your overall net worth is less than one million dollars, is there any sense in covering yourself for an additional million over and above your regular policies? I would think not.” I’m not trying to nitpick, just generating dialogue. I like reading around on the blogs of the PF world and wouldn’t mind starting one of my own. I’m looking for a source of passive income (or relatively passive, at least) that I can work on between full time work and part time graduate coursework.

      • http://www.moneycrashers.com david/money crashers


        You’re absolutely right. I was learning about this umbrella insurance as I was writing the article and yes, I guess you would want to take into account your present net worth and estimate your future net worth to determine your insurance needs.

        You’re not nitpicicking at all–I appreciate it.

        If you like writing about money and pesonal finance, starting a blog is a great idea, and can generate income when marketed properly

        Thanks for the interesting dialogue

  • http://lamar-garnis.webs.com/forexcurrencyoptions.htm Joseph Kottow

    At one point in our life, we also considered purchasing umbrella insurance for our home and car. However, after weighing the pros and cons, we decided to purchase them separately from different insurance companies. We did not only saved money but there were also more benefits.

    • Davidbakke

      Thanks for sharing and I’m glad you found a way to save some money!

  • Caraprtt

    Umbrella policies most often include the expense of a lawsuit. So you are paying for the added coverage and the attorney fees, court cost etc. The attorney/defense cost are in addition to the added 1-5 million of policy coverage. Even if you have a net worth less than 1-5 million, can you afford the expense of trial? After all an umbrella policy is usually less than $200 a year depending on a the amount of underlying policies that you have (auto, home, boat, ATV etc.)

    Also umbrella policies are all encompassing liability. Having a home umbrella and an auto umbrella isnt a good idea. This is a claims nightmare and creates duplicate coverage. The two umbrella companies will basically argue over who is paying for what. The only time you would want 2to umbrellas is one for commercial and one for personal exposure.

    Anyways.. (sorry for typos, using my phone)

    • Davidbakke

      Thanks for commenting–our readers will appreciate it…

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