Should I get umbrella insurance?

Umbrella insurance is excess insurance that sits on top of your other primary insurance coverages (for example, your home or car insurance policy). Umbrella insurance is not needed by everyone, but it can be a great idea to get umbrella insurance for many different reasons. In this article, we explore several types of people that should consider getting umbrella insurance.

How does umbrella insurance work?

Umbrella insurance is designed to pay out when there is a claim in excess of your primary coverages (examples of primary coverages are your auto or home insurance policies). Think of umbrella insurance as a “worst-case scenario” insurance product. It has very high limits to protect you, but will only pay out if there is a very large claim. In addition to having much higher limits than your primary coverage, umbrella insurance also is a much broader policy. Some examples of what umbrella insurance might cover are below:

  • Car accident: umbrella insurance will pay out auto claims costs once your car insurance limit is exhausted
  • Accident at your home: if someone has an accident at your home (for example, they slip and fall) umbrella insurance may pay out any costs above your home insurance limits
  • Slander and libel: if you are sued for slander or libel your umbrella insurance may kick in to cover any court-ordered payouts you are required to make
  • Legal fees: umbrella insurance will cover fees to litigate any of the above (which can be very expensive!)
  • And much more!

Importantly, umbrella insurance does NOT typically cover personal damage or loss – only your liability. For example, if your car was destroyed in a hurricane you would typically only be able to obtain reimbursement through your car insurance policy.

Example of How Umbrella Insurance Works

diagram of how umbrella insurance works

5 Reasons to Get Umbrella Insurance

1. You have a significant amount of assets

If you have a lot of wealth or assets, you should strongly consider an umbrella insurance policy for two reasons. Firstly, having more assets means that you have more to lose in a lawsuit. Secondly, if you are perceived to have more money, lawyers will likely be far more aggressive to try to get more money from you for their clients. The wealthy are by far the largest purchasers of umbrella insurance for these two very good reasons!

2. You have dependents

If you have dependents who need your money, deciding to get umbrella insurance could be a wise decision. For example, if you’ve been saving money for a child to go to college, the last thing you want is to pay out those savings to someone in the event of an accident.

3. Your other insurance policies already have high limits

If you already have high car and home insurance limits, then it might make sense to get an umbrella insurance policy. Because your primary insurance policies pay out before your umbrella insurance policy, every umbrella insurer will require that your primary policies have high limits. In fact, the cost of increasing limits on your primary policies is typically more expensive than the cost of the umbrella insurance policy itself. On average, a $1 million umbrella insurance policy can be purchased for less than $300! If you already have high insurance limits, it can be very inexpensive – and make a lot of sense – to add on an umbrella insurance policy.

An estimate of the limits you will need on your home and car insurance policies is below. Every umbrella insurer has slightly different requirements, but you will typically need insurance around these limits before getting an umbrella insurance policy.

Car Insurance Limits for Umbrella Insurance

Bodily Injury Liability Limit$100k per person / $300k per accident
Property Damage Liability Limit$100k

Home Insurance Limits for Umbrella Insurance

Liability Limit$300k

4. You are well-known

If you are well-known or have a high visibility job (for example in government, on television, etc) then you open yourself up to more potential risk of lawsuits. If you get into an accident, the victim (or their lawyer) may be much more likely to sue you given the perception that you have a significant amount of wealth. If you are very well-known (even just in your local community) then you should definitely get umbrella insurance!

5. You engage in riskier activities

If you are involved in high-risk activities that can very likely cause substantial damage or injuries to others you may want to consider umbrella insurance given its higher limits and broad coverage. For example, if you run a talk show where you gossip about celebrities and pop culture you run a high risk of getting sued for slander or libel. In this case, you should strongly consider buying umbrella insurance.

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