Most people like to secure their most valued assets through home and auto insurance. Umbrella insurance is for those who wish for an additional layer of coverage, either for their highly prized assets, or to protect themselves from high-expense risks like defamation and lawsuits.

Umbrella Insurance

How does umbrella insurance work?

Umbrella insurance is typically sold in million-dollar increments. This means that the minimum insurance coverage it can provide is one million dollars.

As you can imagine, this high coverage amount is well beyond an ordinary insurance. In fact, an umbrella insurance policy works above and beyond a base insurance policy, and is hence also referred to as “excess liability insurance”.

In order to invest in this kind of insurance, most companies may mandate the need for a base insurance policy, with a minimum amount. This can be in the range of 150K – 250K for vehicle owners and 250K – 300K for property owners.

Umbrella insurance makes sense when a person requires additional coverage beyond what these base policies can offer. In this situation, the policy holder can choose to purchase from the same insurance company in order to keep premiums manageable.

How can an umbrella insurance benefit property owners

Typically, a property owner first purchases a basic package to insure their home/property. However, there may be limitations to the insurance coverage they receive.

For instance, the base insurance may protect the property from natural calamities, but not from any damages incurred due to libel or slander, vandalism, loss of privacy, damage caused by renters, damage caused to visitors by pets on property, accidental damage to others on the insured property (like falls or injuries), and so on.

Fortunately, most of these ‘additional risks’ can be covered by umbrella insurance, with higher financial limits (million-dollar increments).

For this reason, property owners are advised to purchase umbrella insurance in the following cases:

  • If you are a landlord, renting to individuals.
  • If you are a landlord, renting to companies, non-profit and voluntary organizations.
  • If you have high-risk assets installed on your property (like a swimming pool, trampolines, gym equipment, etc.).
  • If you or your renters have pets on your property.
  • If you have priceless assets on your property (such as antiques), and their value is not covered by your home insurance policy.

In addition, umbrella insurance can also cover legal fees, if you are sued for one of the above reasons. However, do note that umbrella insurance will typically not cover any damages caused to your own property (as this is covered by basic home insurance).

How can an umbrella insurance benefit vehicle owners

Imagine you get into an accident driving your vehicle. The base insurance may cover the damages caused to either vehicle, the not at fault and at fault drivers.

However, it may not cover thousands of dollars in medical fees due to injuries sustained by the other party in the accident. In this case, an umbrella insurance policy comes in handy to provide additional coverage on top of the base policy.

It may be a good idea for vehicle owners to purchase umbrella insurance in the following cases:

  • If you use your vehicle to tow/transport other vehicles (like boats, bikes, motorcycles, and so forth.).
  • If you use your vehicle to tow/transport other highly prized assets.
  • To provide additional insurance coverage for expensive medical bills and legal fees, in case of an accident.

Again, umbrella insurance will typically not cover primary damages to your own vehicle, already covered by the base policy.

How can an umbrella insurance benefit individuals

Today, there are several high-risk scenarios concerning individuals that warrant the purchase of umbrella insurance. (This is on top of a base personal insurance policy).

  • If you participate in an extreme sporting activity such as skiing, paragliding, mountain climbing, hang gliding, and so on.
  • If you coach children in sports. (Kids can be susceptible to injuries, and umbrella insurance will protect you in case of lawsuits.)
  • If you are a professional critic (like food critic, or reviewer or business products), in which case you may be vulnerable to defamation lawsuits.

Advantages and limitations of umbrella insurance

As described above, umbrella insurance works well:

  • To provide additional insurance coverage to individuals, property and vehicle owners, on top of your basic policy.
  • To provide insurance coverage in high-risk areas and situations.
  • To cover high-expense costs incurred due to medical fees, legal fees, loss of credibility, and the list continues.
  • To protect yourself with insurance, anywhere in the world. (It goes beyond what typical travel insurance offers.)
  • To get a high amount of insurance (million dollars and above), for a low premium. Yes, it is less expensive than you think!

Umbrella insurance also has some limitations, as follows:

  • It has to be purchased on top of a base insurance policy – for individuals, home/property owners, or vehicle owners.
  • It does not cover damage to your own person, property, or vehicles (as these are covered by a base policy).
  • It does not cover damage caused by your business, to other people or their properties.
  • It does not cover damage caused by “recreational vehicles” (like jet skis).
  • It does not cover damage caused due to criminal activity, or expenses incurred due to legal action.

How much should you insure through umbrella insurance

Umbrella insurance is essentially an additional coverage, for high-risk and high-expense scenarios. For this reason, it is sold in million-dollar policies (starting at 1-million, then 2-million, and so on).

It is best to choose a policy that covers your total net worth, so you and your assets are protected in the majority of situations. This can include your total income, your potential future income (especially if you are a student in a high-earning field like medicine, law or entertainment), and the totality of your assets.

Is umbrella insurance cost-effective, and is it worth it?

Yes and yes! A policy for a million dollars insurance coverage can be purchased for as little as $150 to $300 for an entire year. Given the amount of risk individuals, property owners, and vehicle owners face in today’s challenging world, this is a prudent idea for some people.