What is Umbrella Insurance? All You Need to Know

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What is umbrella insurance: 2 damaged cars

Any car accident can exceed your standard auto insurance policy‘s liability limits. You can get better liability coverage and ease your worries with an umbrella insurance policy over $1 million — which helps keep your home, investment accounts, and other valuable assets out of harm’s way.

But what is umbrella insurance exactly, and how does it work? Keep reading to learn more about umbrella insurance, including what it covers and doesn’t cover, the suggested coverage limits, and how much it typically costs.

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What is Umbrella Insurance?

Also referred to as excess liability insurance, a personal umbrella insurance policy pays for additional liability coverage over your liability limits. In addition, it can provide extra coverage for first- and third-party injuries, property damage, legal defense fees, and personal liability.

Umbrella insurance coverage is typically offered in $1 million increments, starting at $1 million.

An umbrella policy can be added to any type of coverage you already have, such as auto, motorcycle, or homeowners insurance. It provides some extra protection — and peace of mind

Umbrella coverage is an excellent policy option for drivers who want coverage above their standard insurance policy’s limit. However, every insurance carrier has terms on what an umbrella policy covers and doesn’t cover.

How Does Umbrella Insurance Work?

To learn more about what umbrella insurance is and how it could help you, consider the following scenarios:

First scenario: A car accident you caused results in bodily injuries to four passengers in multiple vehicles and one pedestrian. All their medical bills come to $740,000, blowing past your $150,000 liability limit. In this case, your umbrella insurance will cover the remaining amount of $590,000 for the injuries. Remember, umbrella insurance will only cover up to your maximum umbrella insurance policy limit.

Another scenario: You are determined to be at fault for a car accident that only caused damages to vehicles. A state minimum liability policy with no personal liability and property damage coverage will likely not be enough to pay for damages to these vehicles. So an umbrella insurance policy worth $1 million would be very helpful to address these liability claims.

How Much Does Umbrella Insurance Cost?

What is umbrella insurance: man talking on the phone while looking at cars that crashed into each other

Umbrella auto insurance usually costs anywhere from $60 to $120 annually for every $1 million increment in coverage. Some insurers are known to offer coverage as high as $100 million in liability limits (Chubb insurance). Be sure to check with your auto insurance provider to learn of any umbrella policy caps. For example, Progressive has a $5 million cap.

When determining the cost, umbrella insurance policies factor in variables such as age, gender, ZIP code of residence, and the number of insured vehicles.

What Does Umbrella Insurance Cover?

An umbrella insurance policy typically covers medical bills due to bodily injury, damage to others’ property, legal fees, and other personal liability situations. Coverage is usually provided in $1 million increments. 

What Does Umbrella Insurance Not Cover?

An umbrella insurance policy and its extra liability coverage typically does not cover damage to or the loss of your own personal belongings, intentional/criminal acts, written contracts, verbal contracts, and business losses.

“Personal belongings” would apply to anything that you might have in your vehicle. For example, an umbrella insurance policy would not cover the cost of a laptop that was ruined during a car accident.  

Any damages or losses caused by intentional or criminal actions are also not covered by personal umbrella policies. This includes the payment of fines, restitution fees, and other court-ordered fees.

Lastly, business losses are subject to umbrella insurance policy exclusions. For example, losses and damages to your business property are not covered. Therefore, you must apply for a commercial umbrella insurance policy if you want umbrella coverage for your business.

How Much Coverage Do Umbrella Policies Offer?

Cars that crashed into each other

Many umbrella insurance policies start at $1 million and go up to $10 million. As a frame of reference, for standard auto insurance policies, many drivers opt for a 100/300/100 policy, which consists of $100,000 in bodily injury liability per person, $300,000 in bodily injury liability per accident, and $100,000 in property damage liability per accident.

This means a $1 million umbrella insurance policy may pay out as high as $900,000 to cover your out-of-pocket costs (once your $100,000 in bodily injury/property damage liability limits have been met).

For policyholders holding state minimum liability policies, umbrella coverage can fill the gap even more. For example, California requires $15,000 in bodily injury coverage per person, $30,000 in bodily injury coverage per accident, and only $5,000 in property damage liability. A single car accident can easily blow past these limits, making an umbrella insurance policy all the more useful.

How Do I Determine the Amount of Umbrella Coverage I Need?

To determine the amount of umbrella coverage you need, first perform an assessment of your assets’ total value. Your assets include physical assets, home equity, bank accounts, and investment assets such as automobiles, savings accounts, and real estate properties that you own.

From there, it’s a good idea to apply a small buffer between your assets’ total value and the umbrella policy limit. For example, if your total asset value is $3 million, a $5 million policy from Travelers Insurance may fit the bill.

Remember, insurers may require that you meet certain liability insurance requirements before offering you an umbrella policy. According to the Insurance Information Institute, most insurers require $250,000 of liability insurance on your auto insurance policy before they can offer an umbrella policy. 

What Are Some Tips to Keep in Mind?

Be sure to evaluate your entire net worth. To calculate your optimal umbrella policy limit, do a detailed calculation of your net worth, tallying all assets, income, Investments, real estate, and retirement accounts. Be sure to consider future earnings and projected increases in net worth, as you may not remember to increase your umbrella policy limits later.

Be mindful of liability limits. Many auto insurance companies will require you to have minimum coverage limits to be eligible for an umbrella policy. So don’t be surprised if a 100/300/100 policy is needed.

A Word About the Fine Print on Umbrella Insurance Policies

If you are considering purchasing an umbrella policy for extra protection on your auto policy, be sure to carefully read the terms and conditions outlined in your policy documents. Take special note of any conditions, exceptions, and exclusions as stated in your policy documents to ensure that you are covered in the way you want.

Do I Need an Umbrella Insurance Policy?

Stressed man with a damaged car in the background

You now know what umbrella insurance is, and maybe it sounds like a good idea. Truthfully, though, many of us can avoid the need for umbrella coverage if we raise the liability limits on our insurance. However, if you have a lot of personal assets, it could be a smart decision to cover those assets with one of these policies. Typically, your policy’s coverage should at least match your assets’ total value to protect them adequately.

Remember to look at your other policies, such as homeowners, personal property, motorcycle, renters, swimming pool, or boat insurance, to see what they cover.

Umbrella insurance can be helpful for drivers who may have trouble paying for legal defense costs arising from an incident in which they are at fault.

Shop Around for the Best Car Insurance Rates

Now that you’ve learned everything there is to know about what umbrella insurance is, we encourage you to compare rates from a minimum of three affordable auto insurance companies.

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