HomeBoat InsuranceHow Does Umbrella Insurance Work? (2024)

How Does Umbrella Insurance Work? (2024)

What Is Umbrella Insurance?

An umbrella insurance policy is supplemental coverage that goes into effect when you exceed the liability coverage limits of other policies you have, such as car insurance, homeowners insurance, renters insurance and boat insurance.

For example, let’s say you’re involved in a serious car accident where the other driver sustains injuries requiring ongoing medical care. Your auto insurance policy has a bodily injury liability limit of $50,000, but the other driver’s medical expenses are $75,000.

If you have an umbrella policy, your insurance company pays the balance of what you owe beyond what your liability insurance pays. It provides extra protection for your assets and can give you peace of mind when serious accidents happen.

What Does Umbrella Insurance Cover?

Here are some of the things an umbrella insurance policy covers:

  • Medical expenses for other drivers and their passengers who were injured during a car accident you caused 
  • Property damage for others
  • False arrests 
  • Medical expenses for tenants who injure themselves on your rental property
  • Defamation of character

More detailed examples of this include:

  • Your sister, who isn’t on your auto policy, causes an accident where the other driver suffers serious injuries.
  • A company sues you for a negative review you wrote about it online.
  • Someone chips a tooth on your trampoline or slips and falls near your swimming pool.
  • Your dog bites someone on your property.

What Doesn’t Umbrella Insurance Cover?

Umbrella insurance is a personal liability policy. It won’t cover the following:

  • Damage done to your personal property
  • Your injuries from an accident
  • Businesses losses, such as property damage or injuries
  • Intentionally malicious or criminal actions

Ask your insurance agent about your policy’s exclusions when you sign up.

How Does an Umbrella Insurance Policy Work?

Umbrella policies kick in when all other coverage is exhausted. For example, suppose you’re involved in a car accident with damages and bills that exceed your liability protection and property insurance limits. In that case, umbrella insurance pays for the rest of the claim up to policy limits. It can also cover legal costs, pain and suffering and lost income if a court finds you at fault for the accident.

Do You Need an Umbrella Insurance Policy?

Unlike car insurance, state laws don’t require you to carry a personal umbrella insurance policy. However, it’s a good idea to have one if:

  • You own property, such as rental property.
  • You have a high net worth.
  • You coach youth sports.
  • You have items in your home that can injure guests, such as a trampoline, a pool, a gun or dogs.
  • You often host events.
  • You’re a writer or editor who reviews products or businesses.
  • You participate in recreational activities where the likelihood of injuring others increases, such as hunting, riding ATVs, boating or riding Jet Skis.
  • The members of your household include a teen driver.
  • You’re a public figure or serve on a nonprofit’s board.

You can further protect yourself by increasing your personal liability limits on your car insurance. Experts recommend carrying $100,000 of bodily injury liability insurance per person, $300,000 in bodily injury liability coverage per accident and $100,000 in property damage liability coverage per accident.

Even though you’ll pay higher premiums, you also gain extra liability coverage. When you combine higher liability limits with a personal umbrella insurance policy, you’ll have financial protection for serious accidents.

How Much Umbrella Insurance Do You Need?

To calculate how much umbrella insurance you’ll need, add up the value of your assets, including your home, rental properties, cars and money you have in savings and investment accounts. Add in future income, too.

Next, examine what your liability limits are on your existing policies. For example, if your assets total $300,000 but your personal liability insurance covers $100,000, you’ll need an umbrella policy that covers at least $200,000.

Many insurance carriers sell umbrella insurance in $1 million increments. These policies cost only a few hundred dollars per year. That might sound like an excessive amount of coverage until you consider the high costs of medical bills, legal fees, pain and suffering and lost income.

Source: The Ramsey Show

What Are the Benefits of Umbrella Insurance?

Benefits of umbrella insurance include protecting your assets if a judgment exceeds the personal liability coverage of your insurance policies. With enough umbrella insurance, you won’t have to pay out of pocket for others’ medical bills and other accident-related costs.

An umbrella policy can also protect you while you’re doing your job. If you review products, services or companies for a living, a negative review you write could cause a business to sue you for libel. If you made any mistakes in the review, you could be on the hook for damages. Having an umbrella policy mitigates the out-of-pocket expenses that could arise.

Also, because umbrella insurance often only costs a few hundred dollars a year, it’s an affordable way to secure some peace of mind.

What To Consider When Choosing an Umbrella Policy

When selecting an umbrella policy, here are a few things to consider: 

  • Assets: Your umbrella liability limit should exceed your net worth since this will reduce the likelihood you’ll have to pay out of pocket for any damages.
  • Existing insurance policies: Some providers require you to have higher coverage limits for your home and auto liability policies before you can buy umbrella insurance.
  • High-value items: Consider an umbrella policy if you have rare artwork, classic vehicles or jewelry with values that exceed the liability limits of your home insurance.

Umbrella Insurance: The Bottom Line

Umbrella insurance provides added liability coverage for when damages exceed the coverage limits of your other insurance policies. It reduces the likelihood you’ll have to pay out of pocket for damages, especially after serious accidents.

Getting umbrella insurance is a good idea if you own property, coach youth sports, host parties or review businesses for a living. You can calculate how much you need by determining your net worth and subtracting the liability limits of your current insurance policies.

Top Auto Insurance Recommendations

It’s best to get umbrella insurance quotes from multiple providers before settling on a policy. Getting multiple quotes lets you compare coverage and prices. Here are two of the best providers offering umbrella coverage — State Farm and Geico.

State Farm: Best Customer Experience

State Farm offers a personal liability umbrella policy with minimum coverage of $1 million for approved claims. You can add more protection in increments of $1 million. If you bundle multiple policies with State Farm, such as car and homeowners insurance, you can receive discounts.

Read more: State Farm review

Geico: Best for Budget-Conscious Drivers

Geico’s umbrella policy comes with bodily injury liability, property damage liability and special coverage for landlords and defamation claims. To qualify for Geico umbrella coverage, you must have auto policy coverage that meets one of these minimums:

  • $300,000 per person and $300,000 per accident for bodily injuries and $100,000 for property damage
  • $250,000 per person and $500,000 per accident for bodily injuries and $100,000 for property damage

If you have homeowners or renters insurance, you’ll need a minimum of $300,000 in personal liability coverage. Geico has many discounts, including up to 25% off for bundling home and vehicle coverage.

Read more: Geico review

FAQ: Umbrella Insurance

Below are frequently asked questions about umbrella insurance.

An umbrella insurance policy covers liability claims against you that exceed the coverage limits on your existing insurance policies. For example, if someone gets hurt on your property and medical expenses and legal fees exceed the liability limits on your homeowner’s insurance policy, your umbrella policy pays the difference.

You may need umbrella insurance if you have a high net worth, own property, host parties, coach youth sport or engage in activities where someone could get hurt. Umbrella insurance protects your cash and other assets from being seized after a large financial judgment against you.

An umbrella policy could be worth having in most cases. Umbrella insurance policies are inexpensive and provide large amounts of financial protection.

Our Methodology

Because consumers rely on us to provide objective and accurate information, we created a comprehensive rating system to formulate our rankings of the best car insurance companies. We collected data on dozens of auto insurance providers to grade the companies on a wide range of ranking factors. The end result was an overall rating for each provider, with the insurers that scored the most points topping the list.

Here are the factors our ratings take into account:

  • Cost: Auto insurance rate estimates generated by Quadrant Information Services and discount opportunities were both taken into consideration.
  • Coverage: Companies that offer a variety of choices for insurance coverage are more likely to meet consumer needs.
  • Reputation and experience: Our research team considered market share, ratings from industry experts and years in business when giving this score.
  • Availability: Auto insurance companies with greater state availability and few eligibility requirements scored highest in this category.
  • Customer experience: This score is based on volume of complaints reported by the NAIC and customer satisfaction ratings reported by J.D. Power. We also considered the responsiveness, friendliness and helpfulness of each insurance company’s customer service team based on our own shopper analysis.

Our credentials:

  • 800 hours researched
  • 45 companies reviewed
  • 8,500+ consumers surveyed

*Data accurate at time of publication.

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