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If you’ve got home and/or auto insurance, you may be wondering whether it’s enough to cover you. In some cases, your policy limits might not be sufficient to take care of all your potential needs. If that’s your situation, you may want to consider umbrella insurance.
Umbrella insurance is a type of supplemental liability coverage that kicks in after your existing auto, homeowners, renters, or other liability policies to give you additional protection. Read on to see whether this coverage might make sense for you and, if so, how to calculate how much you might want.
Key Points
• Umbrella insurance provides supplemental liability protection beyond the limits of standard auto and home policies.
• Calculating your coverage needs involves adding up your total assets and comparing that sum to your existing policies’ liability limits.
• People with higher net worth or greater lawsuit risk may want to consider umbrella coverage, including those with swimming pools, rental properties, dogs, or teenage drivers in their households.
• A $1 million umbrella policy typically costs between $150 and $550 per year, while $2 million in coverage usually ranges from $325 to $650 annually.
• Business liabilities are not covered by umbrella insurance and require separate business liability insurance.
How Umbrella Insurance Works With Your Existing Policies
Umbrella insurance is supplemental liability coverage that exceeds the personal liability coverage you might have through your homeowners insurance and/or auto insurance. It kicks in after your existing auto, homeowners, renters, and/or other liability policies.
To be clear, umbrella insurance is not a replacement for any types of car insurance coverage or home insurance. Rather, it provides an extra layer of coverage that goes into effect only after your primary policies have paid out their limits. An umbrella insurance policy can help protect your assets and income from the financial fallout of larger claims.
Here’s how it works. You pay any deductible or out-of-pocket costs first. Then, your home and auto insurance policies cover bodily injury, property damage, and personal injury up to their stated limits. The umbrella policy pays the excess liability beyond those limits, plus legal defense costs, if any.
Umbrella insurance can be used to help with your personal insurance planning if you’re concerned about the limits on your home and auto policies.
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How To Calculate How Much Umbrella Coverage You Need
To calculate how much umbrella coverage you need, you can start by adding up the value of all your assets. Next, review the liability limits on your existing policies. And then, based on that information, determine your coverage gap.
Step 1: Add Up Your Assets
Add up the total value of your savings, investments, home equity, and other assets. If that number is higher than the maximum amount of liability coverage your home and/or car insurance offers, you may want umbrella insurance.
Step 2: Review Your Existing Liability Limits
Most insurers require that you have policies with limits of at least $250,000 for auto and $300,000 personal liability for home before they will let you purchase a $1 million umbrella insurance policy.
Step 3: Determine Your Coverage Gap
Umbrella insurance only kicks in after the underlying liability limits on your home and auto policies are exhausted. If your primary policy limits fall below your umbrella insurer’s minimum requirements, you may have to consider obtaining new primary policies. If you already have umbrella insurance and your underlying liability limits are too low, typically you will have to pay for costs in the gap before your umbrella insurance will kick in.
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Umbrella Insurance Coverage Amounts and Tiers
Umbrella insurance is often sold in increments of $1 million, up to $5 million. If you want to buy umbrella insurance, the insurance company might require you to max out the level of home and auto liability coverage available to you. Typically, that’s $250,000 for car insurance and $300,000 for home insurance. (How much auto insurance you really need is a separate issue from the umbrella insurance’s requirements.)
Who Needs More Umbrella Insurance Coverage?
People whose net worth exceeds their maximum liability coverage from their standard insurance policies may need more umbrella coverage. Those who are at higher risk of being sued may also want to get umbrella insurance. Factors that increase risk for being sued can include owning a swimming pool, renting out a property you own, having a dog or other large animal, and having a teenage driver in your household.
Younger adults who don’t own a home or whose savings and other assets amount to less than the $250,000 cap on liability coverage in a standard auto insurance policy may not need additional umbrella coverage.
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How Much Does Umbrella Insurance Cost?
The cost of umbrella insurance will depend on your coverage amount, the state that you live in, the number and ages of drivers on your policy, any violations or claims you may have, and the properties you own. An umbrella policy for $1 million can cost anywhere between $150 and $550 per year. An umbrella policy for $2 million will typically cost about $325 to $650 per year.
The Takeaway
How much umbrella insurance you need will depend on several personal factors. If you do decide that you need umbrella insurance, you’ll want to be sure to calculate how much you should get so that you’re covered appropriately.
If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.
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FAQ
Is $1 million in umbrella insurance enough?
Whether $1 million in umbrella insurance is enough for your needs depends on several factors, including your net worth and your risk of becoming the target of a lawsuit.
Does umbrella insurance cover business-related liability?
Umbrella insurance does not cover liabilities incurred in your business life. These require business liability insurance, which is a separate product.
Should I increase my umbrella coverage as my net worth grows?
Increasing your umbrella coverage as your net worth grows is not always a necessity. It depends on your risk profile, future earnings, and other assets. However, it can be wise to review your umbrella coverage if you experience a large net worth increase.
What underlying liability limits are required before buying an umbrella policy?
Most insurers require at least $250k on auto and $300k personal liability on home before allowing you to buy a $1 million umbrella insurance policy.
Can an umbrella policy cover lawsuits that exceed my home or auto policy limits?
Yes, an umbrella policy can cover lawsuits that exceed the liability limits of your home or auto policy. The umbrella policy will kick in only after your underlying policies have reached their maximum payouts.
Photo credit: iStock/miodrag ignjatovic
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