Your auto and homeowners insurance pays a lawsuit only up to its liability limit, and the rest can come out of your savings and future paychecks. A personal umbrella policy adds $1 million or more on top for a few hundred dollars a year. Buy one once what you own and earn is worth more than those limits.
Picture a crash you cause that seriously injures two people, and a court awards each of them $450,000. With auto limits of $250,000 per person and $500,000 per accident, your insurer pays $500,000. The other $400,000 is on you, and the people you owe can collect it from your savings or garnish up to 25% of your after-tax pay, the federal maximum.
A personal umbrella policy is built for that gap. It pays after your auto or home liability coverage runs out. It can also cover claims those policies often exclude, such as libel or slander, according to the Insurance Information Institute. Coverage is usually sold in $1 million increments.
It’s cheap because it only pays once your other policies are used up. Progressive cites an average of $383 a year for a $1 million policy covering one home, two cars, and two drivers, with each additional million costing about $75 more.
Start with the liability limits on your current policies. Insurers typically won’t sell you an umbrella until your auto coverage carries at least $250,000 of liability and your homeowners coverage at least $300,000. You may need to raise those first.
Then choose an umbrella big enough that your combined coverage at least matches your assets, and go higher if you earn a high income, since garnishment reaches future paychecks. The Insurance Information Institute flags households with a teenage driver, a dog, a rental property, or regular pool parties as good candidates.
Pull the declarations page, the one-page coverage summary, from your auto and home policies and compare the liability limits with what you own. If the limits come up short, ask your current insurer for an umbrella quote this week.
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