Imagine that you’re just a few years away from a well-deserved retirement. You’ve got a sizable retirement account, plus a house and car that are fully paid off. Altogether, your assets amount to a little over a million dollars. In short, life is pretty good.
Then, one day, you get into a car crash. Fortunately, you’re not badly hurt, and the damage to your car is well within the limits of your auto insurance coverage. Unfortunately, the other car involved in the crash is full of executives from a large company – and their injuries, and the damage to the car, are much more serious.
A court rules that you are responsible for the accident and must pay for the damage to the other car, the executives’ medical bills, and their lost wages for the time they were unable to work after the accident. Altogether, you owe about a million dollars in damages. Your auto insurance policy only covers the first $250,000 of that, so you’re on the hook for the remaining $750,000.
This could be a complete disaster for you – unless you have an umbrella insurance policy. This kind of insurance takes over when your other policies run up against their coverage limits. In this case, an umbrella policy would cover the extra $750,000 in damages and even pay your legal bills – saving you from having your assets wiped out and your retirement snatched away by a single unfortunate accident.
How Umbrella Insurance Works
Most types of insurance provide one specific kind of coverage. For instance, your auto insurance policy protects you in case of a car accident, while your homeowners policy covers your house, and the belongings in it, against theft or damage. By contrast, umbrella insurance is a single policy that covers most aspects of your financial life – just like an umbrella covers every part of your body in a rainstorm. So any time you run over the liability limits on one of your other insurance policies, your umbrella policy is there to take care of the extra costs.
Umbrella insurance is a type of liability insurance, meaning that its job is to protect you against lawsuits. With most auto insurance policies, the maximum amount of liability coverage you can buy is either $300,000 or $500,000 per accident, but damages in a lawsuit can easily add up to millions of dollars. Having an umbrella policy keeps a massive lawsuit from wiping out all your other assets. In addition, an umbrella policy protects you against being sued for damage that other policies don’t cover, such as an accident you cause at work or on vacation.
What Umbrella Insurance Covers
Types of damage covered by an umbrella policy include the following:
- Bodily Injury. If you injure someone in a car accident and the medical bills exceed the limits of your auto insurance, an umbrella policy picks up the tab. Similarly, if the electrician slips and falls down the stairs while leaving your house, the umbrella policy covers any medical bills beyond the limits of your homeowners policy. You’re also covered for types of injuries that other insurance doesn’t cover. For instance, if your dog bites someone while you’re out on a walk, homeowners insurance doesn’t cover the damage, but umbrella insurance does.
- Property Damage. If your teenager crashes the family car through a fence and into the side of your neighbor’s house, an umbrella insurance policy can pay for any damage beyond the limits of your auto insurance. The policy also covers damage that isn’t included in auto and homeowners policies. If your pet claws up a priceless painting in a neighbor’s house, or your child knocks over an antique crystal vase, or you rent a boat during a vacation and accidentally crash it into a pier, an umbrella policy can take care of the damage.
- Other Kinds of Legal Damages. An umbrella insurance policy protects you if you’re sued for libel or slander – written or spoken words that cause injury to someone else. It can also protect you against suits for false arrest, malicious prosecution, violation of privacy, and a variety of other civil charges.
- Legal Fees. A final perk of umbrella insurance is that it takes care of your legal fees and court costs in a lawsuit. Lawyers are expensive, and the cost of a major lawsuit could force you into settling out of court, even if you know you’re not really at fault. With an umbrella policy, you know you can afford a good lawyer to protect your assets.
What Umbrella Insurance Doesn’t Cover
Although umbrella insurance protects you against most types of lawsuits, there are certain kinds that many policies specifically exclude. For example, many umbrella policies do not cover:
- Malpractice lawsuits
- Workers compensation claims against employers
- Damage caused by a business, or by any business-related activity
- Damage that you cause intentionally to any person or property
Also, it’s important to note that umbrella insurance only protects you from being sued for damage to other people. If you’re the one who gets hurt and needs an expensive operation, it’s up to your health insurer to pay for it – and anything the health insurance doesn’t cover still comes out of your pocket. In that case, an umbrella insurance policy can’t help you.
What Umbrella Insurance Costs
Umbrella insurance policies are generally sold in units of $1 million in coverage. That is, the smallest possible policy is $1 million, the next smallest is $2 million, and coverage continues to climb in $1 million increments from there.
According to Bankrate, umbrella insurance is “the absolute best buy in the insurance business,” at around $150 or $200 per year for the first $1 million in coverage and another $100 for each additional million. However, the websites of actual insurance companies give slightly higher estimates of the cost: Farmers Insurance says an umbrella insurance policy costs “around $250 to $600 a year,” GEICO puts the cost at “less than $300 for $1 million of coverage,” and Liberty Mutual says a $1 million policy costs “about a dollar a day,” or $365 per year.
These figures are only estimates, however. The actual cost varies based on where you live and how good a risk the insurance company thinks you are.
Here are some factors that could affect the amount you pay:
- Your Job. People in some lines of work are more likely to be in accidents that cause harm to others. For example, if your job involves a lot of driving, you have a greater risk of being involved in a car accident.
- Your Hobbies. If you have a boat, a motorcycle, or any other kind of specialty vehicle, that increases the number of ways you could get into an accident.
- Your Pets. Pets, especially dogs, can be responsible for both injuries and property damage. Having a dog, especially a breed that’s considered aggressive, is sure to make your policy more costly.
- Your Driving Record. If you’ve been involved in an accident within the past five years, you’re likely to pay a premium as a result. Also, if any driver in your household is under the age of 25 – even if their driving record is faultless – that increases your risk, and therefore your premium.
- Previous Lawsuits. If you’ve ever been involved in any kind of lawsuit – civil or criminal – that suggests that you are a person who’s at risk for being sued, your policy is likely to be more expensive than someone without a similar history.
The best way to get an accurate price on an umbrella insurance policy is to contact the insurance company directly. Many companies can give you a quote over the phone or by email.
Note that in many cases, you can’t get an umbrella policy unless you already have high-dollar liability coverage on your auto and homeowners insurance. For instance, GEICO only writes umbrella insurance policies for customers who are covered for at least $300,000 of bodily injury and $100,000 of property damage on their auto insurance, plus at least $300,000 in personal liability coverage on their homeowners insurance.
Who Needs Umbrella Insurance
Since the whole point of umbrella insurance is to protect your assets from a lawsuit, it only makes sense to buy it if you have assets to protect. Farmers Insurance recommends buying an umbrella insurance policy if your net worth is at least $1 million – the minimum amount covered by most umbrella policies. Other insurers use a somewhat broader standard: They say umbrella insurance is a good investment for anyone who has more in assets than they have in liability coverage from auto and homeowners insurance. For example, if you have $700,000 in assets and your auto insurance only covers you for $300,000 per accident, an umbrella insurance policy protects the rest of your assets.
The other factor to consider is how likely you are to be sued. For example, if you spend a lot of time on the road, you are more likely to be in an auto accident, which means you’re more likely to be sued. If you often have guests in your home, there’s a greater risk that one of them will be injured there. Having a swimming pool, a dog, or a gun in your house all increase the risk of accidents that could lead to a lawsuit.
If you think an umbrella insurance policy is for you, the next question to ask is how much coverage you need. To find out, follow these steps:
- Calculate your net worth. Add up the value of all your assets – your house, cash in the bank, stocks and bonds, retirement accounts, and anything else of financial value – and subtract the value of your debts.
- Find out how much liability coverage you already have from your existing insurance policies. On your auto insurance policy, there are three separate numbers to look at: bodily damage per person and per accident, and property damage per accident. On your homeowners insurance policy, there’s just one number: personal liability per occurrence.
- Take the smallest of the numbers you found in step two and subtract it from the number you found in step one. The difference is the amount of money you have that’s unprotected. Getting an umbrella policy for at least this amount gives you full protection.
For most people, a basic policy of $1 million is enough. However, Bankrate recommends bumping up your coverage to “$1 million more than you think you will need.” You can’t go back and increase your coverage once you’re in the middle of a lawsuit, so it’s better to have too much than too little.
Like an umbrella on a sunny day, an umbrella insurance policy is something you don’t expect to use. But, also like an umbrella, it’s much better to have it and not need it than to need it and not have it. For just a few hundred dollars a year, you can guarantee your assets won’t be soaked by an unexpected lawsuit, and that you won’t have to liquidate precious assets – such as your retirement fund or a college savings fund – to bail yourself out.
How much liability coverage do you carry?