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Why Should I Have a Personal Umbrella Insurance Policy?

Why Should I Have a Personal Umbrella Insurance Policy?
Table of Contents

Every ten seconds, an American driver is in a car crash. These crashes can involve life-changing injuries. They can also lead to life-altering lawsuits.

In the blink of an eye, unsuspecting motorists can find themselves facing million-dollar lawsuits. In these and other common circumstances, standard auto and homeowner’s insurance is often not enough.

Umbrella insurance policies can bridge the gap. Here’s what you need to know about umbrella insurance and how it can protect your financial future.

Umbrella Insurance Basics

What is umbrella insurance? What does an umbrella insurance policy cover? Many Americans have no idea.

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This is understandable because, unlike other common types of insurance, umbrella insurance is not mandatory. It is not required by mortgage lenders, apartment complexes, or state authorities.

Although this lack of requirement makes it optional, umbrella insurance is vitally important.

Umbrella Insurance Is a Form of Liability Insurance

Instead of covering specific objects, such as your home or your car, an umbrella policy protects you and your financial assets. It covers financial obligations you may incur if you, a pet, or a member of your family is liable for:

  • Injuring another person
  • Causing property damage
  • Paying legal fees on a plaintiff’s behalf

Umbrella policies also cover the legal fees associated with being sued for any of these costs in court. This is important because these costs may not be adequately covered by any other forms of insurance you have.

It’s an Added Layer of Protection

Umbrella policies are a form of secondary insurance. They kick in only after your other insurance policies have paid out the maximum amount of coverage to which you are entitled. When they do go into effect, however, they often pay out large sums of money.

Those payouts cover costs you would otherwise have to pay out-of-pocket from existing savings or future earnings. This is critical because it means your umbrella policy can protect your financial assets and future.

An Example

Imagine that you have a party at your home. One of your guests slips and falls on the wet pavement around your swimming pool.

When they fall, they hit their head. This results in severe injuries and extensive medical bills. It also prevents them from working at their high-income job for several months.

The guest sues you for their injuries, their lost wages, and pain and suffering. Based on their real expenses and income, the court awards them $800,000. It also requires you to pay the legal fees from the court proceedings.

The total cost comes to $850,000. Your homeowner’s insurance covers only $250,000 of that. If you do not have umbrella insurance, you are personally responsible for the remaining $600,000.

If you do not have that money readily available, you will be forced to sell or give up assets such as your:

  • Retirement funds
  • Kids’ college funds
  • Investments
  • Real property such as vehicles, boats, or land you own

This can devastate your financial future, leaving you financially insecure and struggling. If you still cannot afford to pay what you owe, your future earnings may be garnished until your debt is paid. This can be even more financially crippling.

If you have umbrella insurance, however, that $600,000 will be covered by your umbrella policy. You will pay nothing out of pocket. You will be able to rest easy, knowing that your assets and financial security are protected.

What Does Umbrella Insurance Cover?

Umbrella policies cover a wide range of incidents and liabilities.  These include instances also covered by your homeowners and auto insurance, and a few situations that may not be explicitly covered by other policies. Common examples include:

  • Accidents or injuries
  • Physical property damage
  • Medical expenses and lost wages
  • Pain and suffering damages
  • Libel and slander cases
  • Legal fees
  • False arrest and imprisonment cases
  • Malicious prosecution cases
  • Violation of privacy cases
  • Other civil charge cases

In most cases, your policy covers these things whenever you, a family member, or a pet is responsible.

What Is Not Covered by Umbrella Insurance?

While they can be invaluable in many cases, umbrella policies do not cover every situation. Your coverage will not pay for damages or injuries you intentionally inflict on others or their property, for example. They may not apply in criminal cases where you are accused of intentional damages or injuries, either.

Umbrella policies often do not cover:

  • Extremely high-risk hobbies such as drag racing
  • Vehicles and equipment used in unsafe, unapproved ways
  • Farm equipment

If you own or operate a business, you must have separate umbrella policies for personal and business coverage. Private policies will not cover business-related cases such as:

  • Workers compensation claims
  • Malpractice lawsuits
  • Damages or injuries attributed to the business or that occurred on company property

Finally, umbrella policies do not cover your personal medical costs, property losses, or vehicle damage. Your other insurance policies or the policies of the other parties involved in the case must pay those costs.

Is an Umbrella Policy Worth It?

Many prospective buyers wonder, “is umbrella insurance worth it?” This question is particularly common among individuals with limited assets who may view the extra insurance premium as a burden. Individuals who consider themselves to be at low risk of ever getting sued may also have doubts.

The reality, however, is that in this day and age, everyone needs to carry umbrella insurance.

Why is this the case?

  • Everyone is human and makes mistakes.
  • You cannot fully control your family or your pets and their actions.
  • It takes only a split second or a single slip to find yourself in a situation that can ruin you financially.
  • America has never been more litigious than it is now.
  • An increase in litigation funders means that cases that might once have settled out of court are now increasingly likely to be prosecuted in court, racking up extensive fees.
  • A lack of assets does not prevent the court from requiring you to pay large sums.

The alarming truth is that anyone can find themselves facing a bankrupting lawsuit at almost any time. If this happens to you, it is incredibly likely that your primary insurance policies will not provide enough coverage. Your umbrella insurance may be the only thing that protects your livelihood, assets, and financial future.

Key Facts About Buying Umbrella Insurance

When shopping for umbrella insurance, it is important to know that most insurers do not sell umbrella policies independently. Before you qualify to buy an umbrella policy, you must already have at least a homeowners, renters, or condo insurance policy.

If you own a vehicle, you must have auto insurance. Where applicable, you may also need to have RV, motorcycle, boat, or other specialty vehicle insurance.

In most cases, you need to carry a minimum amount of coverage in those policies before you can buy umbrella coverage. For example, an insurer may require that you carry $500,000 in each auto and homeowners insurance before you can buy a $1 million umbrella policy.

The exact minimums you need to meet may vary depending on:

  • The insurer
  • Your desired level of umbrella coverage
  • Your personal risk factors

If you do not have adequate coverage, you may need to update your existing policies or purchase new policies in order to qualify. You may also need to purchase all of your policies from the same insurer in order to be eligible for an umbrella policy. Insurer rules on this point vary, so be sure to inquire before purchasing.

When Should You Buy Umbrella Insurance?

There is no specific point at which policyholders need to begin worrying about umbrella insurance. Ideally, you should purchase an umbrella policy whenever you buy homeowners, renters, or condo insurance. For individuals who cannot or did not do this, however, the best time to buy is as soon as possible.

The longer you go without a policy, the longer you remain at risk of financially ruinous lawsuits.

How Much Umbrella Insurance Do You Need?

For the standard, low-risk American adult, experts recommend $1 million in umbrella coverage. At first glance, this can sound high. In practice, however, it is the average amount of coverage you will need if you become involved in a lawsuit.

Even if you have few or no assets, it is important not to skimp on coverage. You will not be exempt from court judgments and fees because you have no assets, and your umbrella policy will prevent you from spending the rest of your life trying to pay down hefty judgments.

You may need more than $1 million in coverage if:

  • Your income is $100,000 or more per year.
  • Your assets or net worth are worth more than $1 million.
  • You own rental properties.

Each additional $1 million in umbrella coverage becomes less expensive, so affording the coverage you need is easy.

High-Risk Policyholders

Certain behaviors, lifestyle factors, and career fields are considered more high-risk than others. If you meet any of the following criteria, you may need more than the standard $1 million in coverage.

Animal Ownership

Aggressive animals of all species and breeds are statistically more likely to cause harm to individuals and property. If you have animals considered aggressive or high-risk breeds, or that have a history of violent behavior, purchase extra coverage.

Poor Driving Record

If you have a history of vehicle accidents or driving violations, you may be judged more harshly should you end up in court as the result of an accident. Purchase extra coverage to compensate.

Career and Hobbies

If you drive extensively for work, you are at a higher risk of being involved in a vehicle accident. This is true even if you are a great driver. Similarly, if you engage in hobbies around vehicles such as ATVs, RVs, or boats, your likelihood of being in an accident unavoidably increases.

Buying extra coverage is wise.


If you have previously been sued, you are more likely than average to be sued again and to face stiffer penalties if found liable.  Additional coverage can protect you.


Here are a few of the most frequently asked questions about umbrella policies and the essential takeaways you need about them.

Q: Do I Need an Umbrella Policy?

A: YES. Everyone who purchases homeowners, renters, or condo insurance should also consider buying an umbrella policy.

Q: When Should You Have an Umbrella Policy?

A: You should purchase umbrella insurance whenever you first buy dwelling and auto coverage. If you already have other coverage, you should purchase an umbrella policy as soon as possible. This is true even if you have little income or few assets.

Q: Should I Get Umbrella Insurance Even If I Am Low Risk?

A: YES. No one is exempt from risk. It only takes a single accident or misstep for you to find yourself being sued in a court of law. An umbrella insurance policy is an invaluable protection for everyone.

Q: Do I Need an Umbrella Insurance Calculator?

A: No. Most Americans can buy a basic $1 million umbrella policy with comfort and confidence. You may need more coverage if you:

  • Are high-risk
  • Make more than $100,000 per year.
  • Own more than $1 million in assets
  • Own a rental property

If you fall into any of those categories, discuss your ideal coverage level with an insurance agent. They will be able to help you accurately estimate your risk and coverage needs better than any online tool.

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