Umbrella insurance protects your assets if you are sued for an accident or something else catastrophic happens. It will cover expenses over the limits of coverage you have on your car and home insurance.
It is easy for medical bills to add up to more than your coverage limits, especially if there is more than one person involved in the accident. Umbrella insurance should not take the place of your car, home, or business insurance, if applicable. Instead, you should consider it to be supplemental insurance that you add to other coverage.
Do I Need Umbrella Insurance?
Most people who are just starting out in a career do not need umbrella insurance. Once you purchase a home or begin to build assets, you should consider buying it. And if you own a small business or have accumulated significant wealth, you almost certainly should buy it.
Note
One sign it is time to buy umbrella insurance is, you have more in savings than your current homeowners or auto policy will cover for injury.
You can purchase an umbrella policy at the same time you purchase your other kinds of insurance. This practice is known as bundling and can often help you save money on your premiums.
If you own your own business, an umbrella policy will supplement the business insurance you should have in place. Court judgments can be a lot bigger for businesses than they would be for individuals. One small accident on your business property may be enough to shut you down permanently.
As your business grows, you may want to increase your coverage. You can talk to your insurance agent to determine whether you need more coverage. A financial planner may also be able to advise you on the amount of coverage you need to protect your assets.
When Should I Get Umbrella Insurance?
Umbrella insurance becomes more important when you have built wealth and bought assets. Until you do this, you likely do not need to worry about getting the extra insurance. If you work for an employer, are a renter, and have only a small nest egg, you probably do not need umbrella insurance yet.
As you take on additional responsibilities, perhaps a spouse and children or a company you have started, you will have a wider variety of insurance needs. It is important to take the time to think about making insurance adjustments as you go through each of the six major financial steps in your life (getting married, getting out of debt, buying a car, buying a home, finding the right career path, and investing your money) as well as to just reflect on your situation each year.
Note
As long as you have a record of making your payments and filing very few claims, you may be able to save money on your insurance if you change providers every few years.
Your insurance agent can help you recognize when you need a higher level or a different kind of coverage. For instance, once you have dependents, you should buy life insurance. And the final piece of coverage you will need may be an umbrella policy.
Note
As your expenses and assets grow, your coverage amount likely needs to grow as well.
How Does Umbrella Insurance Work?
Umbrella insurance is not a primary insurance policy. It is a secondary policy that kicks in after you have reached your policy coverage limit. It usually goes into effect when you are sued for large amounts of money after a serious accident. When you are being sued, the company that you have umbrella insurance with should work with any other insurance company you have a policy with to help you fight in court and protect your assets.
You may choose to have your umbrella insurance with the same company as your other insurance policies. This can simplify the process if you are sued.
Note
Prior to buying an umbrella policy, you should research potential insurers to make sure they have a track record of protecting policyholders and fighting claims against them.
The premiums for umbrella insurance are often a good deal less expensive than for a comparable increase in coverage from your home and car insurance since the umbrella policy is used far less often. An umbrella policy offering $1 million in coverage typically costs only $150 to $300 a year, according to the Insurance Information Institute. The second million dollars in coverage might cost you only $75 more a year, and you might pay only $50 a year for each additional million dollars in coverage.
In return for a low premium for a $1 million policy, your umbrella insurer will expect you to have a good deal of primary coverage in place: $250,000 for your car and $300,000 for your home.
FAQs
If you have a net worth higher than $500,000, you need umbrella insurance. This is because the more you have, the more you have to lose, and normal insurance policies won't provide enough coverage.
Do I really need an umbrella policy? ›
Not everyone needs umbrella insurance. But for those with significant assets or a high lawsuit risk, it can offer both financial protection and peace of mind.
What is the rule of thumb for umbrella insurance? ›
Value of your assets: An umbrella policy should cover at least your net worth—this is generally what you stand to lose in a lawsuit.
At what net worth do you need umbrella insurance? ›
Key Takeaways. Umbrella insurance is the defensive part of your wealth-building plan. Anyone with a net worth of $500,000 or more should have umbrella insurance. Your umbrella policy limit should be equal to or greater than your net worth.
How much umbrella policy is enough? ›
Your umbrella insurance policy limits should at least cover the amount of your assets left exposed once your underlying auto or home policy liability limits are exhausted. Speak with a representative about umbrella insurance and get a Progressive umbrella policy quote for up to $5 million by calling 1-877-777-1783.
What are the disadvantages of the umbrella policy? ›
What are the disadvantages of the umbrella policy? While umbrella insurance offers extensive coverage, it doesn't cover personal injuries or property, business losses, and intentional or criminal acts.
What happens if I dont have an umbrella policy? ›
If a situation strikes and you do not have that layer of umbrella coverage to protect you, your wages could be garnished, or you could lose your home. Simply put, you would have to find some way to cover the difference between what your current policy covers and the amount you owe.
Do umbrella policies cover everything? ›
An umbrella policy gives you additional liability coverage. This can help cover the cost of injury to others or damage to their property. It does not cover damage to your own home, car or possessions. Coverage for your business activities requires a separate umbrella.
Do millionaires have umbrella insurance? ›
As a general rule, it's recommended to have umbrella insurance coverage equal to your net worth. For example, if your net worth is $1 million, you should have at least $1 million in umbrella insurance coverage. Also, evaluate your insurance providers—they aren't all the same.
Is State Farm umbrella policy worth it? ›
State Farm's umbrella policies are a good choice for customers with a high net worth who want extra coverage for property damage, injuries, and possible lawsuits that could result from various types of incidents.
You don't have to be wealthy to need an umbrella policy—even if you don't have any assets, your wages can be garnished. An umbrella policy picks up where your auto and homeowners insurance policies leave off. It has a high deductible because the deductible is designed to be met by your other policies.
How much is a $1 million dollar umbrella policy? ›
According to an ACE Private Risk Services report noted by Forbes, the average cost a $1 million personal umbrella policy is $383 per year for an individual with one home, two cars, and two drivers. If you need more than $1 million in liability coverage, your policy's cost will increase.
Why are umbrella policies so cheap? ›
Umbrella insurance is quite cheap compared to other types of insurance, especially considering how much coverage it provides. That's because you have to carry plenty of homeowner's and auto insurance before an insurance company will issue you an umbrella policy.
Will umbrella insurance cover lawsuit? ›
Umbrella insurance covers defense costs, judgments and court costs in the event you're sued, and protects against liability related to non-bodily and bodily injuries. An umbrella policy typically covers the following: Personal injury. Bodily injury to others.
Why is my umbrella policy so expensive? ›
Reasons Why Umbrella Insurance Rates Are Rising
Generally an insurer raises rates because they see an increase in claims and payouts associated with them. For umbrella insurance, the trends are rising dramatically. According to Safeco insurance, umbrella claims have doubled from 2010 to 2020.
How much is a $2 million umbrella policy? ›
A $2 million umbrella policy costs around $225 to $375 per year, on average. Every policyholder's umbrella insurance premium will vary based on their personal risk factors, so individuals who own more cars or properties will be more expensive to insure, as will people who are particularly likely to be sued.
Are umbrella policies worth the cost? ›
Umbrella insurance could protect your assets and cover you beyond your homeowners or auto insurance policy if you or a member of your household is involved in a lawsuit. It could be a good option for those with a high net worth, and those with additional risk factors.
Why not to use an umbrella company? ›
Minimal control of your finances
You don't have much control over your finances when you use an umbrella company because they'll pay you your salary after all the deductions have been made on your behalf. While it's straightforward and stress-free, many contractors like having a more “hands-on” approach.
Why is umbrella coverage so expensive? ›
Your umbrella policy's actual cost depends on several factors, such as your location and number of homes and motor vehicles. The higher your net worth, the more umbrella coverage you may need—which, of course, raises your umbrella policy's cost.
