If you are just starting out in your career, chances are you don’t need an umbrella policy. However, as you grow your assets or purchase a home, you may start to wonder, “Do I need an umbrella policy?” Or maybe you’ve just heard the term, but are still thinking, “Wait, what’s an umbrella policy?”
How does it work? What does an umbrella policy cover? Do umbrella policies differ from personal liability insurance?
Let’s dive in.
What is an umbrella policy?
An umbrella policy is additional insurance, usually added as an additional policy to your homeowner’s or auto insurance, that provides significant protection from legal and financial liabilities over your normal insurance. It pays out if you are at fault for damages or injuries if your other policies don’t provide enough coverage.
It’s not quite the same as excess liability insurance, which provides higher limits on the liability coverage you already have. An umbrella policy adds extra coverage that your other insurance may not cover, such as a libel lawsuit.
How does an umbrella policy work?
An umbrella policy is supplemental coverage to your current home, renters, or auto insurance. It kicks in when your other insurance has maxed out. Generally speaking, an umbrella policy protects you and your assets from financial fallout if you get in a car accident or someone is injured on your property. If you own a business, a business umbrella policy can supplement the business insurance you already have in place and can often be bundled with your current insurance for premium savings.
Example:
You have an auto accident with several people injured and are found at fault. Their medical bills total $450,000. Your auto insurance only covers $300,000, so the umbrella policy would cover the additional $150,000. Let’s add to that, saying one of the injured is a dentist and can’t use his hands for several weeks, missing out on his employment. He sues for $100,000 in lost wages. Your umbrella policy would also cover the financial burden, protecting your savings and assets.
As you build wealth and take on additional expenses, an umbrella policy should also grow to include additional coverage.
What does an umbrella policy cover?
Usually, an umbrella policy can cover three major categories: bodily injury liability, property damage liability and other personal liability.
Bodily injury liability may include medical bills and cost of injuries to other people due to an auto accident, pet injury or guest injury in your own home (or landlord property)
Property damage liability covers someone else’s lost or damaged property due to your fault, such as car damage or accidents by your children on school property
Other personal liability includes slander or libel lawsuits, false imprisonment, malicious prosecution, or mental anguish legal action
Umbrella policies don’t cover your own, personal injuries or property damage. It seems obvious, but these policies also don’t pay out for criminal acts or liabilities associated with contracts that you’ve entered.
Do I need an umbrella policy?
There’s no law dictating who should purchase an umbrella policy and when and for how much. However, if you are building wealth or own property, I’d encourage you to talk to your insurance provider about coverage. If you own things that can lead to personal injury, like a neighbor jumping on your trampoline or pool, or you have a pet, then you may need an umbrella policy.
Are you a landlord?
Public figure?
Regularly host parties at your house?
All of these are additional people who should consider an umbrella policy for additional insurance coverage.
You can choose to bundle your umbrella policy with your current home, renters, or auto insurance to save money, however this is not required. The cost is relatively low to the coverage protection and often applies to anywhere in the world.
Your umbrella policy should at least cover your total net worth, or what you would generally stand to lose in a lawsuit. You should also consider the potential loss of future income. Liability lawsuits can stake a claim on current assets and future income, so having enough insurance coverage for both is essential.
So, do you need an umbrella policy? 😊
This is not an advertisement or solicitation for business, and my personal experience does not constitute universal application. Information is for informational and recreational purposes only. Each financial situation is unique, and you should do your own due diligence. Past performance does not guarantee future results. Some content may contain affiliate or referral links.
Jordan is the creator of Lifetime Tidbits and has spent more than 10 years working in finance, primarily as a securities trader. She holds her CFA charter and has been Series 7 & 63 licensed.