You likely have homeowners and auto insurance policies. Why then might you need an umbrella — or excess liability — insurance policy? It’s no secret that insurance costs are rising faster than inflation, and you may be wary of spending more on something you really don’t need. However, if you have significant assets or higher risk factors, an umbrella policy can provide critical peace of mind.
Extra Security
An umbrella policy provides an extra layer of insurance that comes into play once your homeowners or auto insurance policy limits have been reached. Say a guest is injured tripping on your front steps, a driver in your household is found to be at fault in a car accident or your dog bites a neighbor. In addition to medical and repair expenses, these events could lead to a lawsuit that quickly exhausts and exceeds your regular homeowners or auto coverage.
Even if you prevail in a legal proceeding, you’d likely run up a costly bill. Lose, and a settlement has the potential to wipe out your home and other assets — even a portion of your future earnings.
Of course, you could simply boost the coverage limits on your auto or homeowners insurance policies, but that would likely cost you more money. Most umbrella policies cover incidents involving either your home or automobile. In addition, many cover claims that would fall outside the coverage provided by other policies. An umbrella policy could cover, for example, a lawsuit for slander resulting from an offhand comment made at a community gathering.
Learn the Details
When a loss occurs, the first insurance policy against which claims will be made is typically your primary auto or homeowners policy. Once that coverage is exhausted, the umbrella policy generally kicks in.
Although every policy is different, most umbrella insurance covers injuries to other parties, including guests in your home or other motorists on the road. Many also cover damage to property, including your vehicle, home and other items. Finally, umbrella policies usually cover the cost of defending yourself in a lawsuit and any settlements or payouts that result.
Just keep in mind that umbrella insurance isn’t a blank check. Many policies don’t cover business incidents. If you operate a home-based business, you’ll want to consider obtaining separate coverage. Similarly, few umbrella policies automatically cover employees on your property, such as housekeepers, cleaners or child care providers.
Calculating Coverage
When determining the amount of coverage you may need, consider:
- Your net worth. The higher this is, the more coverage you’ll want.
- The number and ages of drivers in your household. If you have several drivers, particularly if they’re teenagers, go for more coverage.
- Items that might attract lawsuits. If you have a backyard swimming pool or a large dog, for instance, consider boosting your coverage.
Many umbrella policies offer coverage starting at $1 million and go up from there. Before assuming $1 million is an adequate amount, tally the value of your assets, including your home, personal possessions and investments. You may find your total is considerably over $1 million. After you’ve determined an appropriate level of coverage, review it every year or two. As the value of your assets changes, your coverage should follow accordingly.
Less Costly Than You Might Think
Many umbrella policies are relatively inexpensive. In some cases, a $1 million policy may cost only several hundred dollars annually. Premiums can vary, based on the amount of primary insurance coverage you have, where you live, and your driving record and credit history.
It typically makes sense to purchase a policy from the company that issued your homeowners and auto insurance policies. Most insurers offer discounts for buying multiple policies. In addition, buying policies together will make it easier for you to coordinate coverage.
Discuss Pros and Cons
Given the relatively low price tag for umbrella coverage, it’s worth considering. But you may want to discuss the pros and cons of buying it with your insurance agent or financial advisor.
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This article appeared in our Q1 newsletter. Click below to view the full edition.