Umbrella liability insurance is insurance that kicks in when your regular insurance – homeowners, automobile, renters, etc. – maxes out or doesn’t cover something. It is not to be used instead of regular liability insurance, but as a supplement.
For example, if somebody slips on the ice on your front porch and is seriously injured, your homeowners insurance might well cover this. But what if your homeowners insurance liability limit is $300,000, and you end up owing $500,000 or more?
This is where the umbrella policy fills in the gap. First you would collect all you can from your regular homeowners policy, presumably the full $300,000. Then you would put in a claim on your umbrella policy for the remaining $200,000 or however much is left.
Umbrella insurance is for extreme and unlikely events, and as such is fairly inexpensive. It is often purchased at liability increments of $1 million, $2 million, $3 million, etc. A $1 million policy can cost as little as $20-$25 a month. Plus if you obtain your umbrella policy from the same company with whom you already have homeowners or other insurance, they may offer you a discount.
So who needs umbrella liability insurance? There are three main factors in determining if umbrella liability insurance is right for you:
1. Assets
The more you have to lose, the more sense it makes to safeguard it. If you are a college student with a four figure net worth, where your bicycle is about your most expensive possession, umbrella liability insurance is surely overkill. On the other hand, if you own a home, if you’ve spent your whole life working hard and you’ve finally built up a substantial nest egg that will enable you to send your children to college and will enable you to enjoy a comfortable retirement, there’s a lot more at stake if you get wiped out in some lawsuit or other catastrophe.
2. Risks
Though umbrella insurance is for unlikely events, unlikely is a matter of degree. Do you have a teenage driver in your family? Do you operate an airplane? A water craft? Do you have a problem with driving intoxicated? Do you operate a business out of your home with customers coming and going? Some lifestyles, some circumstances, create more liability potential.
3. Risk-aversion
Psychologically, how much would another element of protection matter to you? If there’s a 1 in 5,000 chance something will happen this year that will cause you to have to pay out an amount even greater than your existing insurance maximum, does that cause you to lose sleep at night? If you could pay $250 a year to reduce that closer to zero, would you cease to worry about it?
Umbrella liability insurance isn’t for everybody, but for some it can provide valuable peace of mind.