Umbrella policies are aptly named, although they have nothing to do with rain or Mary Poppins. Like an umbrella, these policies form an extra layer of broad insurance protection over and above the liability limits of your existing policies. When properly constructed, they fill coverage gaps in your existing policies and create higher limits for the areas that are covered.
An umbrella policy is a relative bargain in cost per coverage – a policy with $1 million in coverage typically costs around $10 per month, and higher values are available for around $50-$75 per year per $1 million increment.
Since this is a supplementary form of insurance, your insurer will require that you carry a particular level of insurance on both your homeowner's and automobile insurance policies before issuing an umbrella policy. This will vary by insurer but is going to be between $100,000 and $500,000 depending on the type of coverage.
Umbrella policies kick in to pay damages after the coverage limits in your auto or homeowner's insurance are exhausted. They cover third-party property damage, legal expenses and judgments against you, and the medical expenses/lost wages of others harmed due to an accident caused by you or your family, or that took place on your property.
Umbrella coverage is often associated with the very wealthy, who have millions in cash and assets to protect from judgments in any lawsuit. However, anyone who loses a lawsuit against them can be affected, regardless of wealth. Home equity, IRA and Roth IRA accounts, and future wages (through garnishments) can be in jeopardy with an unfavorable judgment. Combined with legal fees, it is easy for an affected middle-class family to rack up substantial debts beyond their assets. (Fortunately, your pension and 401(k) assets are immune from this type of legal action.)
Around 85% of claims against umbrella insurance are related to car accidents. If you log many miles or drive at high-risk times or in high-risk areas, an umbrella policy may make sense for you – and let's not forget about any teen drivers you may have.
Property-related risk factors include pools, trampolines, and dogs (through bite risk). The more risk factors you have, the more useful umbrella insurance becomes.
Umbrella coverage also covers costs for defending against libel or slander. While the charges may be groundless, the legal fees and lost time to defend them can add up quickly.
Does umbrella coverage really cover everything? No. As with any policy, there will be certain exclusions. Umbrella policies may not cover these situations:
- Criminal Acts – For example, an intentionally set fire that destroyed someone else's property. Driving under the influence or driving recklessly may not be covered, either.
- Business-Related Damage – Personal umbrella coverage does not cover any business-related mishaps. Those require separate policies.
- Damages to Your Own Property – Those should be covered by auto and homeowner's insurance respectively.
- Workers on Your Property – Depending on if they are employees or independent contractors, they may not be covered if they do not have their own insurance.
Check your policy to understand the exclusions, and if you are concerned about any particular item (such as tractors, boats or personal watercraft), make sure to specifically include activities with that item in your policy.
Umbrella insurance is not for everybody. If you do not own your own home or have any children, have little or no retirement assets, and not much in the bank, you have better things to do with your money (like save and invest it). However, for a growing number of people, umbrella insurance is a cost-effective way to get peace of mind through greater asset protection. Remember – it's not just for the wealthy.