What is an umbrella policy?
An umbrella policy is extra liability insurance. It protects your finances when your standard Home Insurance runs out. The insurance industry chose the word umbrella in the 1940s as a metaphor. Just like a physical umbrella covers you completely in a storm, this policy provides broad protection over your other policies. If someone gets badly hurt on your property and sues you for a massive amount, this policy covers the difference. It protects your savings and your house from being taken in a lawsuit. Your standard policy might only cover 300,000 dollars in liability. If a judge orders you to pay one million dollars, you are on the hook for the remaining 700,000 dollars. An umbrella policy steps in to pay that huge remaining balance. This policy doesn't just cover your home. It usually links to your car insurance too. If you cause a massive pileup on the highway, your auto insurance pays first. Once that limit is reached, your umbrella policy takes over. It is a single policy that sits on top of everything you own.
Why it matters to you
Lawsuits happen every day. A delivery driver could slip on your icy driveway and break their back. A guest could dive into the shallow end of your pool and suffer a severe injury. If you have high risk features on your property, you need this coverage even more. People who own certain dog breeds often buy this insurance. You should also strongly consider it if you have Pools & Hot Tubs or a trampoline. These items increase the chance of a bad accident. If a terrible accident happens, the injured person will look for a way to pay their medical bills. They will hire a lawyer. That lawyer will look at your assets. If you have a good job, a nice house, and retirement savings, you become a target. An umbrella policy acts like a shield around your hard work. It keeps your personal Property Taxes & Home Finances safe from a single tragic event.
How much does it cost?
This coverage is surprisingly cheap for the amount of protection you get. Because it only kicks in after your standard policy maxes out, the insurance company takes on less risk. You can usually buy one million dollars of umbrella coverage for 150 to 300 dollars a year. If you want two million dollars in coverage, you might pay 75 to 100 dollars more per year. Keep in mind that prices vary based on where you live and what you own. If you have three teenage drivers and a swimming pool, your premium will be higher. Still, for less than a dollar a day, you can sleep soundly knowing your life savings are safe.
What to watch for before you buy
You can't just buy an umbrella policy on its own. Insurance companies require you to carry a certain amount of standard liability coverage first. This is called your underlying limit.
- Home insurance: You usually need at least 300,000 dollars in liability coverage on your home policy.
- Auto insurance: You typically need 250,000 dollars in bodily injury coverage per person on your car insurance.
If your current limits are low, you'll have to raise them. Raising your standard limits will cost you a little extra money each month. You should also check if your umbrella policy covers libel and slander. Most do, but it's always smart to ask your agent. Finally, remember that an umbrella policy doesn't cover your own injuries or damage to your own house. It only pays out when you're legally responsible for hurting someone else or damaging their stuff. It won't cover intentional crimes either. If you purposely break your neighbor's window, your insurance won't help you. It also excludes business activities. If you run a bakery out of your kitchen and someone gets food poisoning, a personal umbrella policy won't cover that lawsuit. You'd need a separate commercial policy for business risks.
