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What Is Umbrella Insurance?

An umbrella insurance policy adds an extra layer of protection to your liability insurance. If someone decides to sue you, umbrella insurance can cover you. If you don’t have many assets, you might not need umbrella insurance. But if your net worth could make you a target for lawsuits, you might want to consider getting an umbrella insurance policy for peace of mind. 

Find out now: How much life insurance do I need? 

Umbrella Insurance Basics

If you own a home or a car, you have a certain amount of liability coverage as part of your homeowners insurance and car insurance policies. That liability coverage insures that if you injure someone with your vehicle or someone slips on your driveway, you’re covered if the injured party decides to sue you. The problem is that this liability coverage has limits. It will only cover you up to a certain amount.

What Is Umbrella Insurance?

Say someone falls through the stairs attached to your back deck and is seriously injured and unable to work for months. They decide to sue you for $500,000, but your homeowners insurance only covers $100,000. You may have to make up the difference from your own assets or take out a personal loan to cover your legal defense costs and any damages you have to pay.

The same could happen if you’re at fault in a car accident. When you selected your car insurance, you chose a certain amount of liability coverage. If you’re sued for damages above that amount, the insurance company won’t bail you out. Your financial assets and your home could be on the line – unless you have an umbrella insurance policy that covers you.

Umbrella insurance policies kick in when you exhaust your existing liability coverage. If you decide to buy umbrella insurance, the company that sells you your policy may insist that you increase your existing liability coverage on your car and homeowners insurance.

Related Article: 4 Tips for Purchasing a Homeowners Insurance Policy

Insurance companies generally would rather provide $1 million of coverage to someone who has a $300,000 underlying policy than to someone who has a $100,000 underlying policy. As a bonus, umbrella insurance will cover you for sue-able offenses not covered by your car or home insurance, like slander and libel.

Who Needs Umbrella Insurance? 

What Is Umbrella Insurance?

The more money you have in assets and investments, the more likely it is that someone could decide to sue you for an amount that exceeds your existing coverage. That’s not to say that all wealthy people are surrounded by potential enemies who will take them to the cleaners at the smallest provocation. It’s just that civil lawsuits cost money to bring to court, so people may be less likely to go to that expense if they think there’s no money in it.

If you’re worried that injury or property damage caused by your vehicle could lead to a costly lawsuit, it’s a good idea to consider getting an umbrella insurance policy. If you think it’s possible that someone who gets injured on your property might go after you for more money than you already have in liability coverage, you might consider getting an umbrella insurance policy. But if you don’t have a lot of assets, you’re on a tight budget or you’re generally fine with taking your chances, you might not need umbrella insurance.

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Umbrella Insurance Costs

Trustedchoice.com puts the estimated yearly cost of an umbrella insurance policy at $380 for liability coverage of $1 to $2 million. That’s just the average, though. The rate you pay for umbrella insurance will depend on the rates in the state where you live, the amount of coverage you need and your credit score.

Your rate will also depend on how risky the insurance company deems your household to be. So if members of your household have a history of auto accidents or there are teenagers living in your household, your rates could be higher. Then there are other risk factors specific to your home such as whether you have a pool. The higher the risk, the higher the rates.

The Takeaway

If you have a high net worth you may be a good candidate for umbrella insurance. Damages in personal injury cases can easily top $1 million and you don’t want your savings and investments to be wiped out if you’re on the wrong end of a lawsuit. As with any financial product, it’s important to shop around to be sure you’re getting a good deal if you decide to buy an umbrella insurance policy.

Photo credit: ©iStock.com/emholk, ©iStock.com/Brzozowska, ©iStock.com/mediaphotos

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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