What Is Umbrella Insurance, and Do I Need It?

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Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about umbrella insurance; specifically, what it is and who needs it.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “Should You Have Umbrella Insurance?” and “New Ways to Save Money on Insurance of Every Kind” You can also go to the search at the top of this page, put in the words “mortgage” or “credit union” and find plenty of information on just about everything relating to these topics.

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Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Brian:

“I have an umbrella policy, which covers the inadequacies of my homeowners and auto insurance policies. But am I wasting money buying more than the bare minimum auto insurance, expecting the umbrella policy to kick in if a settlement goes beyond my auto policy limits?”

OK, Brian, let’s talk about it. We’ll start by talking about what an umbrella policy is and who needs one.

What’s umbrella insurance?

Umbrella insurance does exactly what its name implies: It offers extra protection.

It’s an extra layer of liability insurance; something you buy in addition to the liability insurance you already have in your home and car insurance policies. And what does liability insurance do? It pays people you accidently harm.

So, if you think of a jacket as your existing liability insurance, an umbrella policy is there to give you even more protection.

Most people don’t need an umbrella policy because they’re adequately insured by their home and car policies. So who does? In a word, rich people. The minimum umbrella policy is typically a million bucks, so unless you’re high net worth, you probably don’t need one.

Umbrella policies kick in after your other insurance, like your car or home coverage, is used up. They might also cover things your existing policies don’t, like maybe libel or slander.

Example: Say your Doberman bites one of your party guests, and they sue you for a $1 million. You have a homeowner’s policy, but your liability insurance tops out at $500,000. In this case, your umbrella policy will pay the remaining $500,000.

Because umbrella coverage only kicks in after your regular policies give out, it’s not very expensive. According to the Insurance Information Institute, the average cost for $1 million of coverage is only $150 to $300 per year.

Minimum coverage limits

Now, let’s get back to Brian’s question. He says, “Am I wasting money buying more than the bare minimum auto insurance, expecting the umbrella policy to kick in if a settlement goes beyond my auto policy limits?”

In other words, Brian’s saying that since he has an umbrella policy, maybe he should just buy the bare minimum liability on his car and home policies. After all, he’s paying for the umbrella coverage, and since that kicks in when his regular policies give out, it would make sense to have as little coverage as possible on his car and home policies.

Just one problem, Brian: The companies pedaling these policies won’t let you do that. To get umbrella insurance, you’ll typically need a homeowners policy with a minimum of $300,000 in liability coverage and a car policy with a similar minimum.

In short, until you meet the minimums set by the insurance company for your car and home policies, you won’t be able to get umbrella insurance.

Hope that answers your question, Brian. Now, what about you. Do you have a question to ask? Then do what Brian did: Simply hit “reply” to any of your Money Talks email newsletters and fire away. I can’t answer every question, but I do my best.

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I’m Stacy Johnson. See you here next time!

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The questions I’m likeliest to answer are those that come from our members. You can learn how to become one here. Also, questions should be of interest to other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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