How Does Umbrella Insurance Work and Is It Worth the Cost?
Written by
Jake Safane
Edited by
T. Woods
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Life can be unpredictable. One moment you can be driving to work and the next you can get into an accident. Or maybe you’re hosting a party and someone gets injured at your house. When these types of events occur, you could potentially face liability claims.
While your homeowners, automotive, or boat insurance policies will often provide liability coverage to some extent, depending on the situation, there’s also another option you could consider — umbrella insurance. An umbrella insurance policy provides extra insurance above what your liability insurance covers and can work across different policy types. It can also potentially protect against what’s not covered in your original policies, like libel or slander.
How Does Umbrella Insurance Work?
Umbrella insurance works by providing additional liability coverage on top of what other insurance policies might cover. Umbrella insurance policies are not purchased instead of underlying policies like home and auto insurance but instead provide supplemental coverage.
For example, your homeowners insurance policy might have liability limits of $300,000, but an umbrella insurance policy might have liability limits of $1 million. So if you face a $500,000 liability lawsuit from a guest getting injured on your property, your homeowners insurance might cover the first $300,000 and the umbrella insurance might cover the remaining $200,000.
That said, the specifics depend on the type of umbrella insurance and policy details. With a personal umbrella policy, the insurance company will typically cover the policyholder’s personal liability as a result of bodily or personal injuries (e.g., slander), as well as property damage. Umbrella insurance policies can also extend beyond the named policyholder to also include liability for spouses and dependents or relatives in your household. Note that liability coverage applies to harm you cause others, not your own injuries or property damage.
Commercial umbrella insurance similarly provides additional liability coverage for your business, beyond what policies like general liability insurance cover. Personal umbrella insurance policies do not cover commercial liability and vice versa.
Is Umbrella Insurance Worth the Cost?
Whether or not umbrella insurance is worth the cost depends on factors such as your risk tolerance and the value of your assets. For example, if you’re a homeowner, you might want umbrella insurance to provide extra liability coverage beyond what your auto insurance covers. That way, if someone sues you for a car accident, you can potentially protect other assets like your home from being seized if you lose the case.
According to Ramsey Solutions, anyone with a net worth above $500,000 needs umbrella insurance. If you have that much money, then adding umbrella insurance could be a small price to pay, as you have a lot at stake. Ramsey adds that a $1 million umbrella insurance policy usually costs around $150-$300 per year, so premiums are pretty affordable.
