What Is Umbrella Insurance and Do You Need It?

You’ve probably heard many tips on preparing for “rainy days,” or those moments when unforeseen events lead to unexpected expenses. And when it comes to preparing and protecting your property, maybe you’ve been told umbrella insurance is the way to go.

But what is umbrella insurance and how do you know if it’s worth it for you? Let’s look at common questions about umbrella insurance, including:

This article was updated in December 2023 and I review it annually.

What Is Umbrella Insurance?

When you purchase an insurance policy — such as homeowners or auto — the policy includes liability coverage. If an accident happens and you’re responsible for injuring someone or damaging their property, your liability coverage kicks in to cover the related costs. But what if your liability coverage limit isn’t enough?

As money expert Clark Howard explains, an umbrella insurance policy gives you liability coverage, "beyond what you have from auto or homeowners insurance."

Umbrella insurance provides liability coverage in addition to your existing coverages. If, for example, someone sues you for more than your auto policy liability covers, an umbrella insurance policy kicks in. Umbrella insurance increases your overall liability protection. This is why it's sometimes also called personal liability umbrella insurance.

What Does Umbrella Insurance Cover?

Umbrella insurance can be used for liability claims such as property damage, bodily injury and related lawsuits. But umbrella insurance only kicks in after you reach the liability coverage limits on your other primary insurance policy. So, an umbrella insurance policy covers many of the same liabilities as standard home and auto insurance policies.

I've written more about what home insurance covers and what auto insurance covers on Clark.com. But here are the types of events that typically fall under liability coverage:

  • Property damage to others
  • Bodily harm/injury to others
  • Related legal costs against claims ofproperty damage and/or injury

Consider this example of how umbrella insurance works with your other policies:

If you’re at fault for a car accident, your auto insurance policy will kick in to cover liability claims. This includes the cost for the damaged vehicle, medical bills for people injured, and legal fees. Once the costs exceed your auto liability coverage, an umbrella insurance policy will begin to pay.

To look at numbers, let’s say your auto policy has a $100,000 liability coverage limit. Repairing the car you hit comes out to $10,000, but medical bills for everyone in the car have reached $200,000. That means you’re responsible for $210,000 total. After your auto insurance covers the first $100,000, you’re still liable for $110,000. The remaining $110,000 could be covered with an umbrella insurance policy.

Who Needs Umbrella Insurance?

“Umbrella policies are important generally for people who are pretty wealthy,” says Clark. “It’s people who have a lot of what are known as ‘uncovered assets’ — assets you own free of any debt.”

That’s because — if something bad happens and you’re responsible — once your primary insurance reaches the liability coverage limits, your assets may be at risk. So, the greater the value of your property and assets, the more likely you are to benefit from umbrella insurance to protect them.

You might also want to consider an umbrella insurance policy if:

  • You're a prominent or public figure
  • You own multiple properties (including rentals)
  • Your property has features that are considered risky (or not always covered by homeowners insurance) such as a trampoline, swimming pool, or other water body
  • You have dogs (some dog breeds are excluded from homeowners insurance) or other animals
  • You host events at your house

Clark says:

“It is a very cheap form of insurance and highly recommended to anyone who owns their home free and clear, and has meaningful other assets.”

How Much Umbrella Insurance Do I Need?

To figure out how much umbrella insurance you need, take stock of your assets. Compare the value of your assets to the liability coverage limits that you have from your base insurance policies (ex: your auto and home insurance).

If your assets are more valuable than your current liability coverage limits, you might want to consider an umbrella insurance policy. It’s generally recommended that you have enough liability coverage for the total value of your assets.

Thankfully, the cost for umbrella insurance is relatively low. On average, you can expect to pay around $380 per year for $1 to $2 million of protection.

“Each million you add after that is cheaper than the prior million because the risk that a claim would ever get into those kinds of numbers is so unlikely,” Clark says.

Final Thoughts

If you’re looking for additional protection for your assets against liability claims, an umbrella insurance policy will provide you with liability coverage on top of the coverage limits of your other insurance policies. But the coverage from umbrella insurance only kicks in once you’ve reached the coverage limits of whatever base policy covers damages in an unexpected event.

To see if umbrella insurance is right for you, compare the value of your assets to the liability coverage limits of your existing insurance policies. If the value of your assets exceeds your existing coverages — or if you’re exposed to more risks for liability — then it might be worth shopping around.

Regardless of whether you're considering umbrella insurance, it's always a good idea to review the coverage limits of your base policies. That way, if anything happens to you or your property, you also have enough protection for yourself. Check out these resources to see how much homeowners insurance coverage you need and tips on shopping for car insurance.

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