What’s Umbrella Insurance — And Do I Need it?

Umbrella insurance sounds like something that should protect you on a rainy day — which, metaphorically speaking, isn’t so far from the truth. Like most types of insurance, it’s a policy designed to protect you financially when something bad happens — except in the case of umbrella insurance, the coverage kicks in when that something bad becomes something disastrous.

It’s essentially extra liability insurance to cover property damage or bodily injury beyond the limits of what most homeowners, renters and auto insurance policies provide. Typically, these policies have a maximum amount they’ll pay out, often as low as $250,000. But to cover damages beyond that, you would need umbrella insurance.

WHAT UMBRELLA INSURANCE HELPS COVER

Let’s say you cause an accident that leaves another driver’s Honda Accord with a wrecked bumper, or you leave the tub running and cause water damage to the condo beneath you. Your normal auto or homeowners policies would likely cover that. But let’s say you total a Ferrari or flood the 10 condos beneath you; at that point, you’re going to be on the hook for way more than $250,000. Without umbrella insurance, you may have to empty your savings or sell your investments — or worse, declare bankruptcy — in order to cover damages beyond that.

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While you could pay more for additional coverage in your other insurance policies, often a single umbrella policy makes sense because it can cover different types of damages that are caused by your negligence, whether that’s because of an auto accident, someone slipping and falling in your home or your dog biting a neighbor.

In addition, umbrella insurance can provide liability coverage that those policies don’t cover. For instance, it could protect you if you’re sued for libel, slander, false arrest, shock or mental anguish, malicious prosecution or other legal situations. Depending on your profession, you may be more likely to be accused of such things, so umbrella insurance can act as an added layer of personal protection (in addition to any professional liability coverage you have) in case you’re taken to court.

Let’s say you total a Ferrari or flood the 10 condos beneath you; at that point, you’re going to be on the hook for way more than $250,000.

HOW MUCH IT COSTS

Because umbrella coverage only pays out after your primary insurance policy has covered you, umbrella insurance tends to be very affordable. You can usually get policies for $1 million of coverage for as little as $150 to $300 per year.

Some companies that offer umbrella insurance require that you purchase all your other types of property or casualty insurance through them before they will offer you an umbrella policy — and may even require that you increase your limits on those policies (which could mean higher premiums). Other insurers offer umbrella coverage as a stand-alone policy. It’s important to compare your options to see which will provide you with the best coverage at a reasonable price.

WHY IT’S A GOOD IDEA FOR YOUR FINANCES

An important part of your financial plan is making sure your income and assets are protected, so that if an emergency strikes you don’t lose the things that are most precious to you. Part of that includes having safeguards in place, like insurance policies, that can cover different scenarios. Think about it: You probably wouldn’t want health insurance that only covers checkups; you likely want coverage for when a major accident occurs, too. In a similar way, umbrella insurance can help provide some extra peace of mind for when you’re hit with a big liability — and don’t want to see it wreck the other parts of your financial life you’ve worked so hard to build.