All about umbrella insurance policies

What is umbrella insurance?

An umbrella insurance policy is a valuable form of extra liability coverage that extends beyond the limits of other common insurance policies.

It offers an additional layer of protection for individuals who may face lawsuits due to damages to others’ property or injuries caused by accidents.

It also safeguards against instances of libel, vandalism, slander, and invasion of privacy.

How does an umbrella insurance policy work?

An umbrella insurance policy offers valuable coverage, particularly for high-net-worth individuals with extensive or costly assets who face a higher risk of lawsuits.

It provides an additional layer of protection, safeguarding against potential financial losses resulting from claims. Similarly, small businesses can benefit from an umbrella insurance policy, mitigating potential monetary damages arising from various claims.

Obtaining an umbrella insurance policy from the same insurer who provided your original home, auto, or watercraft insurance can potentially result in a more affordable premium.

It’s important to note that requirements vary by provider. Common requirements include base insurance coverage of $150,000 to $250,000 for auto insurance and $250,000 to $300,000 for homeowners insurance for policyholders who wish to add an umbrella policy.

Also called “excess liability insurance,” umbrella policies pick up where traditional policies leave off (liability limits). So, in the event you get sued, and your homeowners or car insurance won’t cover the damages, your personal umbrella insurance policy will kick in and help pay the bill.

Why consider umbrella insurance?

Since umbrella insurance is designed to cover extreme circumstances, you may not think it’s worth the bother or cost to purchase a policy. However, it may help to put things in perspective by taking inventory of what you own and then asking yourself why you possess them in the first place.

The first assets that will come to mind are your home(s), car(s), investments, and savings accounts. When asking yourself why you own these assets, your response will likely be practical. For example:

• “I own my car to get from Point A to Point B.”
• “I own my home to have a roof over my head and possibly derive income from it in the future.”
• “I have savings for short-term expenses and investments to provide financial security in retirement.”               

These are all good examples of items you need to protect, but a big one is missing: your future income stream.

If you face an expensive lawsuit and your coverage is insufficient, you may need to dip into your savings and investments to cover the costs.

This can adversely affect your current and future financial plans. Personal umbrella coverage can provide the extra protection you need to avoid financial devastation from unexpected events.

What does umbrella insurance cover?

Though the definition of coverage provided under an umbrella policy may initially seem vague, it can be simplified into three broad categories.

Bodily injury liability: covers the cost of injuries to another person, including medical bills and liability claims resulting from injuries to:

• Others, due to a car accident caused by the policyholder
• Others, caused by the policyholder’s pet
• Policyholder’s guests, due to an accident in their residence

Property damage liability: covers the cost of damage or loss to someone else’s property, including these expenses:

• Auto and other property damage caused by a car accident where the policyholder is at fault
• Claims for damage to others’ property
• Accidental damage to school property by a child

Other personal liability: covers potential lawsuits for actions by a policyholder, including:

• False arrest, detention, or imprisonment
• Libel (a damaging written statement)
• Slander (a harmful spoken statement)
• Mental anguish or shock
• Malicious prosecution

Can’t I just increase the liability limits on my current insurance?

It’s also worth considering the option of increasing the liability limits on your home or auto insurance policy. While this approach may cover certain common incidents, it may not fully protect against all potential expenses.

For instance, a car accident could result in legal proceedings, or an offhand remark on social media could lead to a slander lawsuit. Unfortunately, the range of possibilities is vast.

How much does umbrella insurance cost?

Before you buy umbrella insurance, it’s important to know how much it will cost. All insurance policies are priced according to their probability of paying out. Since these policies are less likely to pay out, umbrella insurance policies tend to be pretty cheap.

A personal umbrella policy can range between $200 and $1,000+ annually. Your price depends on several factors, such as your location, the number of cars, boats, or homes you insure, and the coverage you need.

Who should consider purchasing umbrella insurance coverage?

People who normally buy an umbrella policy typically have expensive assets to protect. Alternatively, they may possess hazardous assets that pose a risk of injury, such as trampolines, backyard skate ramps, swimming pools, or even own certain dog breeds.

Furthermore, they might partake in activities that heighten the likelihood of facing legal disputes, including:

• Coaching youth athletics
• Working as a landlord
• Volunteering
• Reviewing businesses online
• Participate in risky activities like hunting, skiing, or surfing

How to calculate how much umbrella insurance you need

When evaluating the suitable coverage level, consider these factors:

• The total value of assets to be protected determines the appropriate amount of umbrella policy coverage. Higher asset value necessitates higher coverage.
• The perceived risk scope requires a thorough and objective analysis of the following: Homeowner/renter risks, 
  accidental risks, and any potentially risky activities that could endanger others.
• The risk of losing future income. Liability lawsuits can target both assets and future income.

Assets with “built-in” protection

Assets in employer-sponsored retirement accounts (e.g., 401(k) or 403(b) accounts) are protected from civil liability under the Employee Retirement Income Security Act of 1974 (ERISA).

The same protection generally extends to up to $1 million in individual retirement account (IRA) assets. Only non-qualified assets (accounts funded with after-tax dollars) and amounts exceeding $1 million in IRAs need consideration when assessing umbrella coverage needs.

For your primary residence, part of its value may not need to be included when calculating umbrella coverage. This depends on your state’s homestead exemption, which protects against forced home sales to meet creditor demands.

For example, suppose you live in a state where the homestead exemption threshold is $500k, and the value of your equity in the home is lower than this amount. In that case, there is typically no need for umbrella liability protection on your home equity. However, for the exemption to apply, you typically have to record a Homestead Declaration with your local registry of deeds.

Final word

Umbrella insurance protects against unexpected events, such as property damage or bodily injury lawsuits. It is important to perform an honest and thorough evaluation of the assets that need coverage to accurately calculate how much umbrella insurance you need. Doing so will give you peace of mind knowing your financial future is secure.

Many policies include coverage for personal injury (e.g., libel or slander) that isn’t typically offered by other insurance policies. This means it could be worth considering even if you are confident that your current policy provides adequate protection.

Finally, speaking with a qualified insurance expert is always important to find the best policy for your needs. Doing so can save you time and money in the long run.

Facet can help you answer your most important insurance questions.

• Which insurance company should I go with?
• How much home or auto insurance do I need?
  Is pet insurance necessary?
• What insurance do I need for my small business?
• If I were to pass away, would my loved ones be able to maintain the same lifestyle?