Do I Need Umbrella Insurance?

What Is Umbrella Insurance?

Umbrella insurance provides coverage over and above the standard liability limits on your primary policies, such as car insurance and homeowners insurance. Umbrella policies typically have coverage limits between $1 million and $5 million, which is much higher than car and home insurance policies carry. Your umbrella policy kicks in when you're found responsible for someone else's injuries or property damage, and the costs exceed the limits on your underlying policies.

Example: Say you have a car insurance policy with $100,000 in liability coverage and a $1 million umbrella policy. You're found responsible for a car accident, and the other driver's medical bills reach $250,000. The car insurance would cover the first $100,000 of that amount, and your umbrella insurance would cover the remaining $150,000. Without umbrella insurance, a court may require you to pay out of pocket.

Umbrella insurance may also provide coverage that you won't get in basic auto or home insurance policies—such as protection against lawsuits filed against you for libel or slander. Any household members in your immediate family are also covered, though umbrella insurance won't extend to businesses you own.

Learn more: What Does Car Insurance Cover?

Who Needs Umbrella Insurance?

Umbrella insurance isn't designed just for high-income earners; it can be a good option for anyone who has assets to protect, such as a home or savings. In particular, it's especially important if the total value of your assets exceeds the coverage limits on your insurance policies.

Here are some examples of individuals who could benefit from having umbrella insurance:

• Pet owners: You may be held responsible if you own a pet, such as a dog, that attacks a person outside your household.
• Landlords: Renting out a property you own could expose you to liability claims if you are negligent and someone is injured on the rental property.
• Parents: Because teenagers are riskier drivers, they're more likely to cause accidents—and you could potentially be liable for any resulting damages.
• Swimming pool or trampoline owners: Having these "attractive nuisances" in your backyard increases the chances of someone being hurt on your property—which exposes you to more risk.
• Those at risk of personal liability: Your job or role in the community, such as being on the board of a charity organization, could potentially increase the chances of being sued for slander or libel.

How Much Umbrella Insurance Do I Need?

To assess your coverage needs, consider the total value of your assets—such as your home, rental properties, cars, boats and savings accounts. Think about what you may be required to liquidate in the face of a lawsuit or a high cost of damages. If the value of your assets far exceeds your existing coverage limits, buying umbrella insurance is a good idea.

Learn more: How Much Homeowners Insurance Do You Need?

Pros and Cons of Umbrella Insurance

When considering whether to purchase extra insurance, you'll need to decide if the cost is worth the potential peace of mind. Weigh these pros and cons during your purchasing decision.

How Much Does Umbrella Insurance Cost?

Umbrella insurance policies are relatively affordable, especially when compared to the average costs of your standard auto and homeowners insurance policies.

The typical cost of a $1 million umbrella insurance policy is $383 annually for a family with one home, two cars and two drivers, according to a whitepaper from RHSB and ACE Private Risk Services. If you want higher umbrella policy limits, your overall cost will increase while your price per $1 million in coverage decreases.

For example, purchasing $1 million in coverage will cost an average of $383 per year based on the above example. But purchasing $5 million in coverage will cost you an average of $608 per year, or $122 per $1 million in coverage.

Learn more: Average Cost of Car Insurance in the US

Is Umbrella Insurance Worth It?

Umbrella insurance can be worth it if you have assets or future income to protect. It provides an extra layer of liability coverage beyond your home and auto policies, kicking in when those limits are exhausted. This can help cover legal fees, medical bills or damages if someone sues you after an accident, injury or property damage.

For most people, the cost—often just a few hundred dollars a year for $1 million in coverage—is small compared to the financial protection it offers.

How to Get Umbrella Insurance

To buy umbrella insurance, you can contact your existing insurance company or agent to see if they offer umbrella policies. Some companies may require you to already hold a policy—such as an auto policy—with them before they let you purchase umbrella insurance.

But like other insurance comparisons, you can reach out for a quote from several companies. This step helps you compare and choose the best policies and price.

The Bottom Line

Umbrella insurance is customizable coverage that offers flexibility and protection in the face of legal uncertainties. If you are concerned about the coverage limits from your traditional auto or homeowners insurance to protect your assets in the case of being found liable for an incident, it may be worth talking to your insurance agent about an umbrella insurance policy.

Deciding to spend a little extra for better insurance coverage can be difficult when budgets are tight. You could make some room in your wallet when you use Experian's auto insurance comparison tool—where you can compare your current policy with coverage from dozens of top insurers.