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What is umbrella insurance, and why should you consider it?
Accidents happen. Someone can slip on ice on the walkway to your house and break several bones. You could rear-end the car in front of you on a rainy night. Your dog could bite the mail carrier.
Your home or auto insurance can cover the costs of these accidents if you're on the hook for them. Sometimes, though, costs can exceed what your insurance will cover. Then you're at risk of having to pay out of pocket — that is, unless you have an umbrella policy.
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Learn more: How does car insurance work? The basics explained.
Umbrella insurance: 'Often overlooked'
'Umbrella coverage is the often-overlooked safety net that can protect you from financial disaster,' said Jason Javaheri, co-founder and CEO of Los Angeles-based J&Y Law Firm, which represents injury victims. And the cost is relatively low for the protection it provides.
J.D. Power's Craig Martin said that according to the J.D. Power 2024 U.S. Homeowners Insurance Study, only 38% of customers with an annual income over $200,000 indicated they have an umbrella policy, while only 22% of those with incomes between $100,000 and $200,000 had an umbrella policy. The percentage dropped to 14% for those with incomes less than $100,000.
That's why it pays to understand what an umbrella policy is, how it works, what it covers, and how much coverage you might need.
Learn more: Homeowners insurance: What it covers and how much you'll pay
What is an umbrella policy?
An umbrella policy is a type of insurance that provides additional coverage if you exceed the liability limits on your home, auto, or other property insurance. It's meant to protect your assets if there is a large claim or judgment against you.
Standard homeowners and auto insurance policies typically provide liability coverage for costs such as medical bills and legal fees if you're responsible for causing property damage or injuries to others — but only up to certain limits. You could easily top those limits if, for example, you were sued for damages related to a multi-vehicle car accident with several injuries.
'That's where umbrella would come into place,' said Kim Bowser, vice president of national product and experience development at Grange Insurance. 'Your auto or home insurance would typically cover the loss first. Umbrella kicks in as an extra layer on top of that coverage protection.'
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How an umbrella policy works
Umbrella policies are available in million-dollar increments, ranging from $1 million to $5 million (but potentially higher for high-net-worth individuals and families), explained Erika Tortorici, owner and principal of Optimum Insurance Solutions in Hamilton, Massachusetts. To buy a policy, you must already have a certain amount of liability coverage through auto, home, or other property insurance. Insurers typically require a minimum of $300,000 in liability coverage on a homeowners policy and $250,000 per person/$500,000 per accident liability coverage on an auto policy.
Learn more: How much car insurance do I need?
Those thresholds are high because umbrella insurance is meant to cover only large claims, said Jennifer Gambill, a Miami-based independent insurance broker with World Insurance Associates. For example, if you were sued because someone was injured on your property and had to pay $500,000, your home insurance would pay up to its $300,000 limit, then an umbrella policy would pay the remaining $200,000.
What does umbrella insurance cover?
An umbrella policy provides coverage for both your home and your automobiles. It can also be extended to cover recreational vehicles, boats and other watercraft, rental property and timeshares, and other members of your household, including children away at school, Gambill said.
An umbrella policy provides coverage for the following:
Injuries to others, including the cost of medical bills and liability claims
Damage to other people's property
Personal injury to others, including libel, slander, and defamation
Your legal fees to defend yourself in a lawsuit
Learn more: What does homeowner insurance cover?
What will an umbrella policy not cover?
An umbrella policy covers your liability to others, not damages or injuries to you or your property. 'If your dog were to bite you, the umbrella policy typically wouldn't cover those medical costs you might incur,' Bowser said.
It also does not provide coverage for the following:
Intentional injuries to others
Illegal activities, including accidents and injuries related to drag racing
Losses related to a business you run out of your home
Legal costs related to something you agreed to in a contract
What types of claims would fall under an umbrella policy?
Here are just a few examples of the types of claims that would be covered under an umbrella policy.
You accidentally hit someone while driving or cause a serious accident with multiple vehicles
You post something defamatory about someone on social media and are sued
Your children's friends are injured on your trampoline or pool
Your dog seriously injures a delivery person
Learn more: What does homeownership not cover?
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How much umbrella coverage do you need?
The amount of umbrella coverage you need depends on what you want to protect. For a standard two-car household with one home, $1 million in umbrella coverage can be adequate, said Alaina Hixson, director of sales and operations at The Churchill Agency, an independent insurance agency near Nashville, Tennessee. 'The more assets you have, the more protection you need,' she said.
You might also need more protection if you are exposed to more risks, such as teen drivers in your household or a sport or hobby such as hunting that could result in others being injured. Your insurance agent can help you assess how much umbrella coverage you need.
How much does umbrella insurance cost?
Umbrella insurance is relatively inexpensive for the coverage you get, said Tortorici. For example, a household with one home and two drivers would typically pay $250 to $350 a year for a $1 million umbrella policy, she added.
Adding teen drivers to your coverage will drive up your rates. So will multiple properties, vehicles, and watercraft. Your location, claims history, and driving record will also affect the cost of umbrella insurance. However, you typically can get a multi-policy discount when bundling an umbrella policy with your existing home, auto, or other property insurance.
Learn more: How much is homeowners insurance? A guide to lowering costs.
Pros and cons of an umbrella policy
There are plenty of benefits of owning an umbrella policy, but there are a few cons to consider.
Pros
Expanded liability coverage to protect your assets if your underlying home or auto insurance liability coverage isn't enough to pay for large claims
Relatively low cost for the coverage you get
Wide range of coverage for liability claims
Additional coverage for claims not typically covered by home and auto insurance, such as libel, slander, and even false arrest
Coverage for other household members in addition to coverage for the policyholder
A single policy can cover a range of property, including a home, vehicles, and watercraft
Cons
High underlying liability limits on your home and auto insurance are required to purchase umbrella coverage
Coverage is limited to injuries and damage to others and their property, not you or your property
Additional cost of owning a supplemental insurance policy
Who needs umbrella insurance?
'Umbrella insurance isn't just for the wealthy,' Javaheri said. 'It is for anyone with something to protect.'
You should consider an umbrella policy if any of the following applies to you:
You own a home and vehicles
You own rental property
You have a high net worth
You have teen drivers
You have a pool or trampoline
You have an RV, boat, or other watercraft
You have a dog
You engage in high-risk activities that could injure someone else
Who doesn't need umbrella insurance?
To have umbrella insurance, you must have certain primary insurance protection in place. 'If you don't own a car or home, you can't get an umbrella policy,' Gambill explained.
For example, you probably don't need umbrella insurance if you are a renter who relies on public transportation. That said, you still should get renters insurance with the maximum amount of liability coverage available.
Learn more: How an auto and renters insurance bundle can save you big
How to get an umbrella policy
The best way to get an umbrella policy is through your existing auto or home insurance provider. In fact, if you want an umbrella policy to cover your home, vehicle, and other property, all policies have to be under the same insurance carrier, Hixson said. Plus, having multiple policies with one carrier usually allows you to score a discount on your premiums.
Rarely would it make sense to get an umbrella policy through a different insurance carrier than the one you have. A few circumstances, such as owning a hard-to-insure breed of dog or having a bad driving record, might force you to get an umbrella policy through a specialty carrier, Tortorici said.
Umbrella insurance FAQs
What are the disadvantages of an umbrella policy?
You can't buy an umbrella policy unless you already have an auto or homeowners policy with a high level of liability coverage. You might have to switch insurers if your current provider of home or auto insurance doesn't offer umbrella coverage.
Plus, an umbrella policy is an additional insurance cost. 'You're paying for the peace of mind,' Tortorici said. 'Hopefully, you don't use your umbrella.'
Is umbrella insurance worth it?
Umbrella insurance can protect your assets if you accidentally injure someone or damage property and have to pay a large claim. Although most state laws prevent your home from being seized if you're sued, your other property, investments, and wages could be at risk if you don't have enough liability coverage through your existing home or auto insurance to pay claims. 'I've seen [umbrella insurance] do amazing things to help people,' Hixon said. 'I don't think you can be overprotected when it comes to liability in this country.'
Do I have to get umbrella insurance through my current provider?
You usually have to buy umbrella insurance through the insurance company that provides your auto or home insurance. However, some insurance companies offer stand-alone umbrella policies, meaning you don't have an auto or homeowners policy with them.
Tim Manni edited this article.
