Who Needs Umbrella Insurance?

by Emily Guy Birken on January 11, 2013

umbrella insuranceUnlike health and auto insurance, umbrella insurance may not seem like a necessary expense. But the fact of the matter is that umbrella insurance can protect both your assets and your future earnings in the event of a lawsuit. Here is what you need to know this under-utilized insurance:

What Is Umbrella Insurance?

This insurance is a form of liability coverage. You already have some liability coverage through your auto, home, or renter’s insurance, but each of those types of insurance will have relatively low liability limits. Umbrella insurance covers you once you have exhausted your liability limit through your traditional insurance. If, for example, you get into a major car accident, you could potentially be sued for an amount much greater than the liability limit.

If that happens and you do not have an umbrella insurance policy, then your personal assets could be seized in order to cover the costs—including your attorney’s fees.

Most umbrella insurance policies will pay for defense costs, as well as property damages, medical bills, and lost wages of the person injured. In many cases, your primary auto or home insurance will not provide coverage that is nearly as comprehensive, even if you do not reach your liability limit.

How Much Does It Cost?

Considering the fact that umbrella insurance policies are generally offering $1 million in coverage (or more), it may seem as though this sort of insurance is out of reach for all but the very rich. The truth is that the premiums for this sort of coverage are quite reasonable. According to the Insurance Information Institute, a $1 million policy costs between $150 and $300 per year, while the second million dollars of coverage will be another $75, and every additional million will cost $50 each.

It is important to note that you may have to increase your liability limits on your auto and homeowners policies in order to purchase an umbrella policy. Because these policies do not kick in until your other coverage has been exhausted, insurers generally want to see you carrying $250,000 of liability insurance on your car insurance and $300,000 of liability insurance on your homeowners insurance policy.

Who Needs Umbrella Insurance?

If you ask anyone involved in the insurance industry, they will tell you that everyone needs umbrella insurance. And there is certainly evidence that this is true. Considering the fact that America is a litigious society and the fact that juries have regularly awarded millions of dollars to claimants in lawsuits, it does seem as though umbrella insurance can help to protect just about anyone.

However, some individuals are more vulnerable than others to the possibility of a lawsuit. According to ABC Action News, those vulnerable individuals include people who own a home or condominium with a pool or a trampoline, dog owners, and parents of teenage drivers. In each of those cases, there is a higher likelihood of an accident resulting in a lawsuit.

The Bottom Line

We should all consider purchasing umbrella insurance, as it can mean the difference between weathering a negligence-related crisis, and facing financial ruin.

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Emily Guy Birken

Emily Guy Birken is a freelance writer and stay-at-home mom who is passionate about personal finance. She lives in Lafayette, Indiana with her mechanical engineer husband and her toddler son. She blogs about parenting at The SAHMnambulist and about the funny side of money at Live Like a Mensch.
  • Jon McKenzie

    Great post! I’ve carried an umbrella policy for years and it is good to see someone write about them. My Father told me years ago to carry one after an incident that he was involved that was no fault of his own. It’s a small investment that can protect you in a worst case scenario. Thanks for the follow on Twitter too…

  • I’ll probably get umbrella insurance eventually but I don’t feel the need for it quite yet. One day soon though!

  • Kim

    I have a million dollar umbrella policy. We got one originally because my husband drove a van as a basketball coach. Even though the school district would probably have been liable, we just weren’t sure. It’s pretty cheap and it give great piece of mind.

  • I have an umbrella policy myself. I have it because I have a rental property and it helps to keep me covered. If I owned a handful of properties, I would consider forming an LLC, but for just one, the umbrella policy provides the protection I need.

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