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How to Choose an Umbrella Insurance Policy and Limit Costs

Updated Mar 09, 2022   |   9 mins read

Umbrella insurance is a type of insurance that provides protection above and beyond what other insurance policies offer. It’s important for people who have substantial assets, savings, or high incomes. If you get sued, umbrella insurance can help you avoid out-of-pocket losses — even if the claim is a very expensive one.

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What Does Umbrella Insurance Cover?

Umbrella insurance covers you in cases when major liability claims are made against you. Your policy will protect you if:

  • Someone gets hurt or killed on your property;
  • You hurt or kill someone in a car accident;
  • You do serious damage to someone else’s property; or
  • You’re sued for slander or libel.

You’ll likely have other coverage that also protects you from financial responsibility in these circumstances. For example, you probably have a homeowner’s insurance policy that will pay for both claims made against you and any legal defense costs you might incur if someone is hurt or killed on your property. You likely have auto insurance to cover you if you cause an accident.

Umbrella insurance covers you for damages that might exceed the amounts afforded by those standard policies. If coverage under your other insurance policies runs out because you hit your limit, your umbrella liability policy kicks in to pay for costs you might otherwise have to cover out of pocket, including:

  • Legal defense fees
  • Settlements or financial judgments entered against you

That’s where umbrella insurance gets its name. It acts as an umbrella, above all your other coverage, and covers you against a broad range of big losses.

Who Needs Umbrella Insurance?

You might want to consider purchasing umbrella insurance if:

  • You have substantial assets. In many cases, when someone is severely injured or killed, the victim (or their family) settles for the policy limits on your car or homeowner’s insurance. However, if you have own significant property, victims have much less incentive to settle the claim within policy limits. They may try to pursue a larger settlement because they know you have the personal wealth to pay it.
  • You have a high income. The same issue applies if you have a high income. People may be more aggressive in suing you because they know they can garnish your wages to collect money beyond what your standard insurance policy pays out.
  • You have a higher risk of being sued. If you have a trampoline or swimming pool, for example, you’re at higher risk of someone being hurt on your property — so buying an umbrella policy makes more sense.

How Does Umbrella Insurance Work?

Let’s say you cause a car accident resulting in property damages and injuries. Your auto insurance policy may provide you with $100,000 in coverage per person injured, $100,000 in property damage coverage, and $300,000 in bodily injury coverage per accident.

But what if the accident was more than a minor fender bender? What if you hit and killed a family of three traveling in a Mercedes or Rolls Royce? Not only would you have caused property damage likely exceeding your coverage limits, but chances are good you’ll face a wrongful death lawsuit.

This is where your umbrella insurance policy kicks in. Your auto insurer would cover the first $100,000 in property damage and $300,000 in personal injury liability, and your umbrella insurer would pay any remaining damages up to your coverage limits.

If you didn’t have umbrella insurance and were successfully sued for $1 million, you could end up personally owing hundreds of thousands of dollars, plus attorney’s fees.

How to Buy Umbrella Insurance

Many companies sell umbrella insurance but you will need to have underlying insurance coverage to be eligible. In other words, you need to already have auto insurance coverage because umbrella insurance is secondary or supplementary insurance, not primary insurance. Some umbrella insurers will require you to carry more primary coverage than what the law mandates.

A typical umbrella insurance policy provides at least $1 million in coverage. Policies offering $1 million are usually the most affordable, with annual premiums ranging from roughly $150 to $300. You can buy more than $1 million in coverage, but the more coverage you buy, the higher your premiums will be.

How Much Coverage Do You Need?

It’s difficult to determine exactly how much umbrella insurance you need to buy because the appropriate amount of coverage depends on your individual situation. Some of the factors to consider include:

  • Your level of risk. If you commute long distances to work every day and drive often, your chances of a car accident may be greater. If you have a pool or trampoline, the risk of someone getting hurt on your property is higher. The more risk you have, the more coverage you’ll want to purchase.
  • Your net worth. The wealthier you are, the more vulnerable you are to being sued. A larger umbrella policy is important when you have a high net worth because you have so much more to protect.
  • Your current and future income. The more money you make, the greater the risk of your wages being garnished or substantial funds being taken from you in the event of a judgment. The more potential earnings you stand to lose, the larger your umbrella policy should be.
  • The amount of coverage you can afford. Obviously, you don’t want premiums for umbrella insurance to create a financial hardship. Consider what you can reasonably pay in premiums each year in exchange for the peace of mind an umbrella insurance policy can provide.

Since umbrella insurance is relatively affordable, it’s smart to err on the side of caution and buy more coverage, rather than less. Accidents can happen to anyone, no matter how careful you are, and you don’t want to lose everything you’ve worked so hard for because in the event of a tragedy.

How Much Does Umbrella Insurance Cost?

According to Trusted Choice, umbrella insurance policies usually cost anywhere from a few hundred dollars annually for $1 million in coverage to $1,000 or more for a policy with higher coverage limits, such as $10 million.

There are many factors that can affect the cost of an umbrella insurance policy, including:

  • The level of risk you present. If you’re considered high risk, your policy will cost more. Perhaps you have a pool, trampoline, or dog at home; maybe you own a boat or sports car. Your driving record and history of past claims can also affect your premiums.
  • Who’s in your household. The risk of car accidents is higher among 16- to 19-year-olds than any other age group, so if you have teenagers at home, you’ll likely face a higher premium.
  • Your net worth. Again, a higher net worth makes you more vulnerable to lawsuits.
  • The amount of coverage you buy. Umbrella policies with higher coverage limits will have higher premiums.
  • Your credit history. Credit is a factor in pricing many types of insurance policies, including umbrella insurance. Applicants with imperfect credit can expect to pay higher premiums than those with higher scores.
  • Your location. Umbrella policies cost more in some states than others. Geographic price disparities exist for many reasons, including accident rates and insurance fraud risks.

The insurance company you select will also affect your rates. There can be dramatic differences in premiums from one insurer to another, so be sure to shop around carefully when looking for umbrella insurance coverage.

What are the Pros and Cons of Umbrella Insurance?

Umbrella insurance has its share of both advantages and disadvantages.

The Pros of an Umbrella Insurance Policy

  • Affordable coverage. You can usually get around $1 million in umbrella insurance for just a few hundred dollars per year. This is a small price to pay for a whole lot of protection.
  • Asset protection. You don’t have to worry about losing your property in the event of a large claim against you if you have substantial umbrella coverage.
  • Income protection. You also don’t have to worry about having wages garnished due to a large judgment against you if you’re found at fault.

The Cons of an Umbrella Insurance Policy

  • You may be required to increase underlying coverage. Your umbrella insurer may require you to buy more than the minimum in auto liability coverage, further increasing your overall costs.
  • You’ll be paying premiums for another insurance policy. Although a few hundred dollars a year may not seem like much, this is in addition to policies you’re already paying for, including auto insurance and your homeowner’s policy.
  • Umbrella insurance may not cover all losses. For example, if you’re sued for an error you make in your business dealings, your umbrella policy may not provide coverage — even if your underlying policies don’t fully cover you, either.

Bottom Line

Umbrella insurance supplies you with added protection in the event you hit the liability limits of your primary insurance plans. If you have a substantial income or lots of assets, you should look for a personal umbrella insurance policy to make sure you’re as safe as possible from big losses in case claims are made against you.

As with all insurance policies, you should carefully read the fine print to understand what’s covered — and make sure you shop for umbrella insurance that offers the most comprehensive coverage at a price you can afford.