Standard auto and homeowners insurance policies are designed to handle day-to-day accidents. They aren’t meant to absorb a catastrophic lawsuit. When a bad car accident, severe injury, or defamation judgment hits the million dollar range, umbrella insurance is what protects your assets from a plaintiff’s lawyer.
Umbrella insurance provides an extra layer of liability protection above your base insurance policies. It kicks in after your underlying limits are exhausted. In some cases, umbrella policies may also respond to certain claims that are not covered by underlying policies. If you’re accumulating wealth, owning real estate, or simply earning good income – looking at umbrella insurance is no longer a luxury. It’s risk management.
Why Umbrella Insurance Makes Sense Today
You may have heard that basic liability limits of 100,000 per person/$300,000 per accident are no longer enough. That’s because they often don’t last long when tested in court. Serious auto accidents with brain injuries, spinal cord damage or wrongful death claims aren’t unusual to exceed $1,000,000. In some states, jury verdicts reaching $5,000,000 to $10,000,000 aren’t considered outliers in catastrophic injury lawsuits anymore.
Medical expenses are only part of the story. A victim who sustains serious injuries may require emergency surgery and months of intensive care hospitalization. Initial medical bills can easily exceed $500,000. Add long term care, physical therapy and home care assistance, and total claim values can reach $2,000,000 or more. Throw in lost income and attorney fees, and you have a recipe for six and seven figure judgments.
Property damage doesn’t hurt either. Repairing or replacing newer vehicles with sophisticated safety technology can easily run over $50,000. Homeowners who must rebuild after fire or severe water damage commonly exceed six figures.
Bottom line: your base liability limits were never intended to protect your long term financial well-being from these types of losses. That’s what umbrella insurance is designed to do.
Consider Your Exposure As Your Wealth Grows
Liability doesn’t only threaten your savings account. Lawsuits target available assets which means home equity, investment accounts, rental property, and in some cases even future income through garnishments.
Perhaps you make $150,000 per year from your job. At age 35 that may equate to several million dollars in future earnings. When defending a serious injury lawsuit, that future income is calculated into your ability to pay.
Do you have any other risk factors? Teen drivers, short term rentals, boats, swimming pools, excessive social media usage – these all increase likelihood of large claims.
At Bowthorpe & Associates Insurance Producers we like to tell our clients that we don’t sell umbrella insurance because we want you to live in fear. We sell umbrella so you can sleep well at night knowing what you’ve worked hard for is protected.
What Does Umbrella Insurance Protect
An umbrella policy is designed to protect you above your underlying insurance policies including:
Auto insurance
Homeowners insurance or renters insurance
Landlord Liability policies
Some recreational vehicle insurance policies
If you have $500,000 in liability on your auto policy and are sued for $1.7 million, your auto policy would pay its limit first ($500,000). A $1 million umbrella policy would pay next up to $1 million. Without umbrella, you would be personally responsible for the balance.
Umbrella starts at $1 million of coverage. Most insurers allow you to increase limits in $1 million increments. It isn’t uncommon for families to carry between 2-5 million dollars of umbrella. Higher net worth individuals and families can carry $10 million or more.
Many umbrella policies also provide additional coverage for personal injury claims such as libel, slander, invasion of privacy or false arrest. Say you have the basic liability limits on your homeowners policy that exclude defamation, if you get sued by someone over a post on social media your umbrella could provide a layer of protection depending on how the policy is written.
Understanding Umbrella Policies & Minimum Requirements
Insurance companies require you to have minimum underlying limits before they will issue umbrella insurance. Common minimum limits we’ve seen are $250,000 limits on auto policies and $300,000 limits for homeowners liability insurance.
Bear in mind that purchasing umbrella insurance does not give you an excuse to be careless with your primary limits. Adequate liability limits should be your foundation.
You’ll also want to ask how defense costs are handled under the umbrella policy. Some insurers pay defense costs outside of the liability limit which preserves the umbrella amount for settlement. Other insurers use a “defense in, defense out” model which means defense fees count against the total limit.
Something else to look for is self insured retention. This is the amount you would be responsible for if a claim is not covered under one of your underlying policies and the umbrella.
How Much Umbrella Insurance Should I Buy
A good rule of thumb is to purchase umbrella limits equal to your net worth. You can then factor in annual income and any additional risk factors your family may have.
Professional advisors often recommend:
Minimum of $1 million in umbrella for most families.
2-5 million for families with significant home equity and investment accounts.
Higher coverage if your family has risky assets such as teen drivers, rental property income, or high incomes.
The nice thing about umbrella coverage is that it’s usually pretty affordable when you compare it to the protection it offers. For lower risk families $1 million of umbrella protection can be priced as low as $150 dollars per year.
Don’t leave it up to chance. Review your assets, liabilities and risk exposures with your advisor to determine how much umbrella makes sense for you.
Final Word…
Remember, it only takes one lawsuit to wipe out years of smart saving and investing. That’s why umbrella insurance exists – to absorb catastrophic liability and keep your home, investment and future income safe.
If you took a look at your liability limits today and shuddered at the thought of your insurance paying it all out, then it’s time for a review. Talk to a professional who can look at your overall exposure and help you align your umbrella limits with your real world risks.
Frequently Asked Questions
How much umbrella insurance do most families have?
Most families have between one million and two million dollars of umbrella. Families with higher incomes, teen drivers, or rental property income typically carry three to five million dollars of umbrella insurance or more.
Is umbrella insurance required?
Umbrella insurance isn’t required in most states. However, most insurance carriers require you to have certain minimum underlying limits before they will issue an umbrella policy.
Will umbrella insurance cover my rental property?
Personal umbrella can extend coverage over your landlord liability policy, but whether or not your rental is covered depends on how you’ve set up your rental. Short term rentals often require separate landlord endorsements or commercial coverage.
How much does a million dollar umbrella policy cost?
For low risk families we have commonly priced umbrella policies starting at $150 per year and going up to $350 per year. Once you start adding risk factors and purchasing higher limits pricing will increase.
Should I increase my auto liability before getting umbrella insurance?
Typically yes. Most insurance companies we’ve dealt with require higher limits of liability on both auto and homeowners policies before they will issue an umbrella policy. Increasing your auto liability can also help improve your protection and may help lower your umbrella cost.