What is umbrella insurance and how does it work?

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When you purchase an insurance policy, your coverage is limited by your policy restrictions. With car insurance, this could be the current value of the car. With home insurance, this could be the replacement value of your home in its current condition. Insurance can be a lifesaver, but many policies have gaps in their coverage.

When you purchase an umbrella policy on top of your regular insurance, you get additional liability coverage that goes beyond the benefits of your main insurance. This policy can cover things like slander and privacy invasion suits, in addition to bodily injury and property damage.

Here’s what you need to know about umbrella insurance:

What is umbrella insurance?

An umbrella policy, also known as excess liability coverage, adds another layer of coverage to your other insurance policies. The purpose of an umbrella policy is to protect your assets — like your home equity and retirement savings — in case you exceed the liability limits of your home or auto insurance policy. Umbrella insurance is additional coverage and should be used to supplement your primary insurance policies.

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How does umbrella insurance work?

Umbrella insurance helps you fill in the gaps in your insurance policies. Although mortgage lenders can specify the amount of homeowners coverage you need, many homeowners don’t have enough personal liability coverage. An umbrella policy increases your coverage in case someone sues you and you don’t have a high enough liability insurance limit.

With umbrella insurance, you and other members of your household won’t risk losing your home or other possessions if your insurance policy doesn’t cover all damages in the event of an accident. Umbrella policies also protect against claims that your traditional policy might not cover, such as defamation or false arrest.

Example: If your young driver is texting while driving and causing a 12-car pile-up, your auto insurance coverage likely won’t cover medical expenses and repairs for all the vehicles involved. An umbrella policy can help you cover the extra costs.

You can file a claim against an umbrella policy just as you would a claim against your home or auto insurance. You will need to provide supporting documents, including documents about your main insurance payments, settlement or decision documents, and accident reports.

What does umbrella insurance cover?

Umbrella policies typically cover a wide range of liabilities, including:

  • Bodily injuries: Umbrella insurance helps pay for injuries sustained by other parties, such as someone falling on your property or someone getting hurt in a car accident. Once your home or auto insurance coverage reaches its maximum, the umbrella policy will cover the excess.
  • Property damage: Umbrella policies cover the cost of damaged property that exceeds the limits of your home or auto insurance policy. Additionally, many umbrella policies cover rental vehicles and vacation rental liabilities. Owners can purchase umbrella insurance for additional coverage against personal liability.
  • Worldwide coverage: You can purchase umbrella policies that protect you from any incident that occurs while you are out of the country.
  • Legal fees: Some insurance policies will not cover many legal fees (if any) resulting from your liability in the event of an accident. An umbrella policy ensures that you don’t have to pay legal defense costs and court costs if you are at fault in an accident or incident.
  • Other liabilities: Umbrella policies also cover various incidents that could result in lawsuits for false arrest, slander, defamation, and mental anguish.

What does umbrella insurance exclude?

Although an umbrella policy provides additional liability coverage, it is not the right solution for all situations. An umbrella policy will not cover the following:

  • Your injuries and personal effects: Umbrella policies protect against personal liability. The policy will not cover injury or damage to you, your household or your personal effects. You cannot make a claim on an umbrella policy for your medical expenses or damage to your home, car, or property.
  • Commercial losses: Personal liability insurance policies do not apply to professional liability. You can purchase company-specific umbrella policies if you need to protect company assets.
  • Contract liabilities: If you have a contract agreeing to take on specific responsibilities, your umbrella policy will not cover them. Contractual liabilities are more common in businesses, but they can also apply to owners who might otherwise use umbrella policies to provide additional coverage against damage and injury.

How much does umbrella insurance cost?

The cost of an umbrella policy depends on several factors, including the amount of coverage and your other insurance policies. You can typically expect to pay between $150 and $300 per year, or between $15 and $30 per month, for a $1 million umbrella policy. You can buy umbrella fonts in $1 million increments.

The amount of coverage you need depends on your risk tolerance. You’ll want to consider your risks as a homeowner, the likelihood of causing an accident, and your potential loss of future income. Consider factors such as your commute, the age of drivers on your car insurance policy, and risky activities that take place on your property (like swimming).

Good to know: Since an umbrella policy covers additional expenses after your primary insurance has been reimbursed, the insurer will want you to have sufficient coverage. Most insurers require a minimum of $250,000 in liability coverage with your auto insurance policy and $300,000 with your home insurance policy.

Who needs umbrella insurance?

The purpose of umbrella insurance is to provide financial protection if you are sued. While anyone can be sued, not everyone is equally likely to face a legal battle. You should consider an umbrella policy if your current home or auto insurance policy will not provide adequate coverage in the event of a serious incident. Other people who might benefit from an umbrella policy include:

  • Owners with tenants
  • Homeowners with pools, especially those planning to host pool parties
  • Owners with dogs
  • Parents of teenage drivers
  • Drivers with long or difficult journeys
  • People with lots of savings or assets
  • People participating in high-risk activities that could harm others, such as hunting
  • Homeowners with trampolines or other potential yard hazards

Umbrella insurance is a safety net that provides extra peace of mind in the event of an accident where you are financially responsible. If you’re worried about an accident causing financial ruin, consider adding an umbrella insurance policy.

Further reading: Risk insurance: what it is and what it covers

How to buy umbrella insurance

If you are interested in purchasing an umbrella insurance policy, here are a few things you will need to do:

  1. Review your current insurance policies. Review your home and auto insurance policies to make sure you have the minimum coverage required to qualify for an umbrella policy. You will typically need at least $250,000 in liability for your auto policy and $300,000 for your home.
  2. Determine the coverage you will need. Examine your risk factors and assets to estimate your likelihood of being sued or held responsible for an incident. Think dog bites, accidents in your yard, and car accidents.
  3. Compare rates. Consult the rates of several insurers to find the one that suits you best. You may want to check with your current auto or home insurance provider, as adding umbrella insurance to an existing policy can potentially save you money.
  4. Provide the necessary documents and complete the application. Complete all forms from your insurer and provide proof of home and auto insurance, as well as any other documents required by your insurance company. Once your policy is set up, keep your records in a safe place in case you need them.
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Disclaimer: All insurance related services are provided by Young Alfred.

About the Author

Angela Brown

Angela Brown is a student loans, personal finance and real estate authority and contributor to Credible. His work has appeared in Fox Business, LendingTree, FinanceBuzz and Yahoo Finance.

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