Over the last few months umbrella insurance has come up a few times, which made it top of mind to include on our blog. Umbrella insurance may not be glamorous, and it may not seem like a high priority. But it’s one of those things you’d rather have if needed, than be standing on the sideline without it when something bad happens.
A Story About the Need for Umbrella Insurance
I recently learned of an instance where an individual had bought a golf cart. They had visited a neighbor’s house, and needed to run home to get something. A few people decided to ride along. The golf cart went around a corner a little sharply. Due to the weight of the individuals, it tipped over. The accident wasn’t good. A couple of the individuals were hurt; one was out of commision-based work for a while.
The person driving felt terrible and submitted a claim to their insurance provider; however, the golf cart was not covered on any of the policies. So, beyond what their health insurance covered, the individuals hurt didn’t have any source of financial support. It was a scary situation for everyone involved.
While everyone involved wished they could go back and make the accident not happen, we cannot change the past. What could have perhaps helped relieve some of the stress after, though, would have been having proper liability insurance… an umbrella policy.
What is Umbrella Insurance?
So, let’s start with what is umbrella insurance. It is a liability policy. It will kick in after liability limits on homeowners insurance or car insurance is depleted. It will also cover things that aren’t under those umbrellas, such as liability related to libel, slander, etc.
So, in the simplest terms, it is an insurance policy that casts a wider net, or an umbrella, over all of the things that could go wrong. it is a resource that can be used (up to its limit) to pay if the worst happens.
Important to note, is that umbrella insurance covers the household not an individual person. So, if you have a spouse or children, the policy also covers them as well. Make sure to understand how your insurance company defines household, to ensure proper coverage is in place (i.e. is a college student away from home included or not).
How does Umbrella Insurance Work?
Let’s say you own (you own it, not rent) a condo. As you head out the door you start the laundry, because that’s efficient! However, while you are away there is an issue and the water line starts leaking. Water is everywhere. Not good.
Let’s compound it by saying you live on the fourth floor. Water has been gushing from your apartment down through walls and is finding its way wherever it can go. The total damage to your unit and the units below you to get them professionally dried out, replace ceilings, walls, and have hardwood floors repaired comes to a grand total of $500,000. (I don’t honestly know if that’s a realistic figure, but let’s go with it!)
Your homeowners insurance has a $300,000 liability limit on it, so your homeowners insurance will only pay that amount (minus your deductible). So, the remaining $200,000 is either going to come out of your pocket (i.e. deplete savings). But, if instead you have an umbrella policy, that policy would then pay out the additional $200,000.
Who Needs Umbrella Insurance?
Only you know if you “need” umbrella insurance. However, the following are individuals who likely should highly consider having umbrella insurance. If you check off more than one of these items, the potential risk you have increases, and likely means umbrella insurance is a good financial move.
- drive a lot or live in densely populated areas where pileups are common
- insure young or elderly drivers
- condo owner
- own a swimming pool
- have domestic workers (i.e. plumbers, electricians, roofers) on your property
- have a dog
- own a boat, RV, atv, golf cart, or snowmobile
- serve on the board of your HOA, condo association, or are on the board of a nonprofit
- have assets worth protecting
The list above is not exhaustive. The bottom line is, if you have any reason to believe umbrella insurance could be protective, it’s a good idea to carry it. It cannot hurt you, and as you’ll learn in a minute it is not expensive to carry.
What does Umbrella Insurance NOT Cover?
Umbrella insurance really does cover a lot of ground; however, there are a few very specific exclusions. So, it’s important to know about them and if these exclusions apply to you, to consider alternate routes for coverage.
- Damage to Your Own Property: remember this is a form of liability coverage. So, going back to the initial story I shared, the golf cart repairs would not have been covered under an umbrella policy.
- Damage you or your household members cause on purpose: So if you go Carrie Underwood and take a Lousiville Slugger to someone’s car, an umbrella policy is not going to help you out.
- Business or Professional Activities: liability related to business needs to be covered under a business liability insurance policy.
- Liability you assumed under a contract: If you expressly assume liability under a contract, then your umbrella insurance will not pay out.
- Liability related to war or armed conflicts.
What’s the Best Way to Get Umbrella Insurance Coverage?
Umbrella insurance is something you will want to get through the insurance agent/company through which you hold your homeowners and car insurance. Because umbrella insurance has a minimum liability amount for these policies, it is important to ensure the carriers are aligned. In fact many companies won’t sell umbrella insurance to someone who doesn’t hold the other types of policies with them.
Interestingly, when we added umbrella insurance to our insurance mix, it lowered our homeowners and car insurance premiums. There was an added benefit for having an additional line of insurance. This doesn’t always happen, though, if the liability limits need to be raised on these underlying policies.
How much Umbrella Insurance do I need?
Umbrella insurance policies are typically sold in denominations of $1 million in coverage. So, you can get a policy for $1 million, $2 million, $3 million, etc. in coverage. The answer to the question, though, is what number would you go to bed tonight feeling good about, how much you’re willing to spend on umbrella insurance, and the asset amount you are protecting.
The value of your liability risk (i.e. if you think there is potential for a significant dollar loss, the more likely a higher number is reasonable). Also, if you have a large sum of assets you are wanting to protect, the higher the amount of liability insurance is likely warranted.
How Much does Umbrella Insurance Cost?
Here is the great news, and I’ve alluded to it throughout this article. You may be thinking $1 million dollars in coverage is going to cost an arm and a leg. I’ll let you in on the secret… it doesn’t.
Generally, $1 million in coverage costs between $150 to $350 per year. Each additional $1 million in coverage adds about $100-$150 to the policy’s premium. This varies based on what insurance company you work with, where you live, and the number of property items (homes, cars, etc.) you are insuring. That’s a lot of peace of mind for around $1 (and potentially less) a day!
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