Umbrella insurance is an aptly named product, because it can bail you out on a very rainy day.
A lot of people are not familiar with the term. And even those who have heard of umbrella insurance are not sure how they should use such a policy to protect their assets.
For example, a Money Talks News reader named Brian asks this question:
“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 accidentally 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 have a 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 $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.
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.