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Umbrella coverage boosts liability protection beyond your other policies if you cause damage.
This article was reviewed by Andrew Flueckiger, a member of the Finder Editorial Review Board and certified insurance counselor and licensed insurance agent in five states.
You could find yourself in a tough position if you’re responsible for more damage than your insurance covers. To avoid unexpected debt, you could buy optional umbrella insurance, available through many home or car insurance companies. However, umbrella insurance isn’t necessary for everyone. To figure out whether you need it, look at your current car, home or renters policies and determine if the maximum limits protect all of your financial and property assets.
How does umbrella insurance work?
Umbrella insurance is liability coverage that protects you and family members living in your household over and above your existing liability insurance, like home or car liability coverage. Think of it as an extra safety net that pays for medical bills if you injure someone or pays to repair or replace someone’s belongings that you damage. Umbrella liability insurance also pays for legal fees if someone takes you to court and expenses go beyond your other liability insurance.
Say you needed to make a claim on your car, home, renters, boat or other personal liability insurance. Umbrella coverage kicks in with extra liability coverage if the damage costs above your maximum limits on your current policies, or if you don’t have an existing policy that covers the liability.
Umbrella insurance covers a wide range of scenarios involving liability:
- Damage from a car accident that’s your fault exceeds your auto insurance limits.
- Another child’s parents sue you when your child starts a fight.
- A worker gets injured on your property and wants compensation for medical bills beyond your home insurance limits.
- You’re sued for a social media message or review you posted.
- Someone gets hurt at your home while enjoying your playground, trampoline or pool.
- You hurt someone while skiing or hunting.
Umbrella liability insurance in action
Who needs umbrella insurance?
You might need an umbrella policy if you:
- Have a high net worth or high-value asset.
- Are a target for lawsuits, like a CEO or public figure.
- Hire others to work at your home, like gardeners or contractors.
- Have an aggressive dog or a dog with a history of biting.
- Are a landlord or own property on homesharing sites.
- Volunteer or work with children or animals.
- Carpool with others or are a rideshare driver.
- Need worldwide auto liability coverage.
You might not need umbrella coverage if:
- You have high car or home insurance limits.
- You don’t have a lot of assets.
- You don’t work with, commute or hire other people.
How much umbrella liability insurance do I need?
To find how much umbrella insurance you need, review your net worth, home value, retirement plans and investments and total your assets together. Then, see if your current car, home or renters liability limits meet or go beyond the dollar value of your assets. The rule of thumb is to buy enough umbrella insurance coverage to equal your net worth.
However, consult a financial adviser if you have significant assets, like a net worth over $500,000. The general rule is based on how liability lawsuits often use your current assets or insurance coverage to settle the case. But a personal financial adviser can help you understand whether your finances warrant more or less coverage than other people.
Umbrella policies range from $500,000 to $5 million in coverage. However, you also need a minimum amount of liability coverage on your home and auto policies to qualify, such as $300,000 bodily injury liability and $100,000 of property damage liability on your auto insurance policy.
How to calculate how much you need
For example, say your home is worth $400,000, your cars are worth $50,000, and your savings and retirement are worth $250,000. Your net worth totals $700,000, minus any debts you have. An umbrella policy of $1 million should fully protect all your assets if you’re sued, even in a worst-case scenario.
How much does umbrella insurance cost?
A $1 million umbrella policy typically costs between $150 and $300 each year, according to the Insurance Information Institute.
Those rates may seem lower than a typical car or home insurance policy because umbrella coverage works in addition to your home and auto policies. Your risk of maxing out the coverage is lower with this policy.
Does it have a deductible?
Umbrella insurance doesn’t have a deductible, but it might come with a self-insured retention amount. This functions similarly to a deductible in that you may have to pay out of pocket, but differs in that the self retention amount doesn’t reduce your claims payout.
The general rule of thumb is that the self-insured retention only applies if the umbrella policy covers you for something that your underlying insurance doesn’t. Otherwise, your underlying policies have their own deductible, so you won’t be hit twice.
Is it tax-deductible?
If you have a personal umbrella policy, your premiums likely won’t be tax-deductible. However, if your umbrella policy is supplementing other business policies you have, your premiums may be tax-deductible.
What isn’t covered?
Watch out for some areas that your umbrella insurance doesn’t cover, including:
- Your car or home damage. Damage that happens to your home or car accident damage won’t be covered by this policy. You’ll need your car insurance coverage or your dwelling coverage on home insurance to cover these situations.
- Your injuries. If you get hurt, your own health insurance or the property owner’s liability insurance would cover medical bills.
- Your business. If you own a business and want extra liability protection, you’ll need a commercial umbrella liability policy.
- Family with their own policies. Your policy may not extend to your spouse, children or other household members if they have their own home or auto policies.
Compare companies with personal umbrella insurance
You can often add umbrella insurance with your existing car insurer, but high net worth individuals may need a separate stand-alone umbrella policy. Compare car insurance companies that offer umbrella insurance.
Umbrella insurance isn’t mandatory, but it could protect you if you’re liable for large expenses that your basic insurance doesn’t cover. To get the best price, compare car insurance companies with umbrella coverage.
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