What is umbrella insurance?

Just like an umbrella can help protect you from a spontaneous downpour, an umbrella policy may help protect your financial future from costly liability claims. While your auto and home insurance likely has provisions for liability coverage, there are situations when it might not be enough, and an umbrella policy could supplement your existing liability limits. A common misconception is that umbrella coverage is only for the wealthy, but that is not always true. Umbrella policies may aid in protecting your current and future assets, so if you own your home, have a 401(k) or are just starting out in your career, this coverage may be beneficial.

What is an umbrella insurance policy?

Personal umbrella insurance provides extra liability protection when the coverage on your other policies falls short. It is designed to cover costs that exceed the liability limits of your underlying policies — including your home insurance policy, auto insurance policy and other policies like watercraft or motorcycle policies. If you have to file a liability claim and the loss goes over the limit of that underlying policy, your umbrella could kick in to provide extra protection. This may include additional coverage for legal costs after a covered claim.

When you’re learning how umbrella coverage works, it may be helpful to think of the policy as literally that — an umbrella. Your other policies all nest underneath the umbrella, which is there to provide extra liability if a covered claim on any of the underlying policies goes over that policy’s limit.

How does umbrella insurance work?

Now that you know what personal umbrella insurance is, you may be curious to see it in action. Here are some examples of an umbrella policy in use:

You’ll rarely file a claim for a new incident directly on your umbrella policy, except in certain cases where coverage isn’t available from your underlying policy but covered under an umbrella policy. If something happens — whether it’s on your auto, home or any other insurance policy — you’ll usually file the claim on the corresponding policy first.

What does an umbrella policy cover?

An umbrella policy may provide peace of mind when you face costly liability claims, but it may be important to understand what it does and does not cover. Most umbrella policies will cover:

In general, umbrella policies cover liability claims that go above and beyond the limits of your underlying policies. In rare circumstances, an umbrella policy may offer coverage for instances not covered by your underlying policies.

What does an umbrella insurance policy exclude?

Umbrellas may be helpful policies, but they don’t cover everything. Here are some things that typically aren’t covered by personal umbrella insurance:

Keep in mind that all policies are different. To make sure you understand what your umbrella insurance does and doesn’t cover, you might want to talk to your insurance agent or company.

How much does umbrella insurance cost?

The cost of umbrella insurance varies. Many of the factors that affect your home insurance and auto insurance costs may affect the cost of your umbrella policy. These could include location, the features in your home, the types of cars you drive and your claims history. The price will also vary based on how much coverage you purchase.

Most umbrella policies start at $1 million, but you may be able to buy higher limits for a higher premium. Additionally, the number of underlying policies that an umbrella covers may also affect costs. A $1 million umbrella that is providing extra coverage for a home and auto policy will likely cost less than a $1 million umbrella that covers a home policy, an auto policy, a vacation home policy and a boat policy, for example. This is because the company issuing the umbrella policy likely sees additional underlying policies as riskier.

Many auto and home carriers also offer umbrella insurance. If you already have a homeowners or auto policy policy, you could ask your agent if the insurer sells umbrella coverage. Your insurer will likely have certain requirements you must meet before getting an umbrella policy. For example, it’s a common requirement that any underlying policy will have to have a certain level of liability coverage to qualify for an umbrella. You may also be required to bundle your underlying policies with the same insurer.

Some homeowners insurance companies may enable you to increase your homeowners liability limit to $1 million or more, which may eliminate the need for an umbrella insurance policy. However, keep in mind that increasing your liability limits on your home policy doesn’t change the liability limits on your other policies. An umbrella coverage provides extra liability coverage for all your underlying policies.

Do I need umbrella insurance?

Generally, you might want to consider an umbrella policy if you have any personal factors that pose greater liability risks or if you have high-value assets. These could include:

Umbrella coverage provides an extra layer of financial protection against liability claims. Even if you don’t have high-value assets or elements that post a higher level of risk, it might be worth looking into umbrella coverage. If you’re not sure if an umbrella policy is right for your needs, consider talking with a licensed insurance agent or financial advisor.

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