Reviewing Your Insurance Options: Is an Umbrella Policy Worth It?

Is an umbrella policy worth it for you and your family? Although this type of insurance coverage might have seemed like an unnecessary extra when you originally purchased your home and auto policies, having one in your current stage of life could make a lot of sense.

It's especially wise when considering that many auto and home insurance policies may not fully protect your savings and assets—essentially, your quality of life—if you're liable for damages incurred from an accident.

What does an umbrella policy cover?

Also known as personal (or excess) liability protection, an umbrella insurance policy provides coverage above and beyond a typical insurance policy if you're found to be at fault and sued for damages.

That's a good thing, given that many basic auto and homeowner insurance policies offer just a small amount of coverage in these cases. That could mean you'd have to draw from your own assets—such as your savings or retirement accounts—to pay for any additional damages awarded to the victim that are beyond your policy's liability limits.

For example, let's say you're held liable for someone's injuries that incur damages of $600,000. If your homeowners policy has a $250,000 liability limit, it would only pay up to that amount, leaving you responsible for the remaining $350,000. But if you also have an umbrella policy with a $1,000,000 limit, it would step in and cover that $350,000.

With all this in mind, is an umbrella policy worth it to you? Let's look at some situations to help you decide.

When is an umbrella policy useful?

So, what are some situations where an umbrella policy would benefit you? Some of the most common scenarios include:

• An accident on your property: Someone falls and twists their knee due to a small hole in your lawn (the one you've been meaning to fill in) and sues you for medical bills. The jury awards them a $400,000 judgment, but your homeowner's insurance has a $200,000 liability limit. Without an umbrella policy, you'd be on the hook to pay the additional $200,000, plus any legal fees not covered.
• An at-fault car accident: Your teenager gets into a car accident and is at fault, and damages to the other person's car plus medical costs exceed your auto insurance policy's $25,000 liability coverage.
• An accident while traveling: When you travel outside the US, your homeowners and auto policies don’t apply—but your umbrella policy offers global coverage. For example, if you hurt someone while traveling in Europe, your home and auto insurance wouldn’t pay anything. Your umbrella policy, on the other hand, would kick in, usually after a small deductible like $1,000.

The more assets you naturally accumulate as you progress in your career and life—and the more you open yourself up for liability lawsuits—the more it makes sense to look into an umbrella policy.

Benefits of umbrella policies

You can usually purchase excess liability coverage to increase the protection offered by your insurance plan. However, increasing the coverage on those basic policies may not offer you some of the protections that an umbrella policy can.

For example, an umbrella policy not only provides coverage above and beyond regular insurance, but it also covers additional costs such as legal fees and damages from libel, slander and false imprisonment.

These policies typically cover you as the policyholder as well as your household family members. And because an umbrella insurance policy doesn't pay out until all other policy coverage limits have been used up, they're relatively low-cost.

Potential drawbacks

There are many reasons to get an umbrella insurance policy, but there are also reasons you might not want or need one. The biggest potential drawback is that you can't get an umbrella policy without a minimum amount of underlying liability coverage on insurance policies such as auto and homeowner's insurance.

Like other insurance policies, some umbrella policies come with a deductible and won't kick in until you've paid that amount out of pocket. The deductible can range in the hundreds up to several thousands of dollars before your claim is paid out. In addition, an umbrella policy won't cover liability in a business or professional instance. For that, you'll need a business liability policy.

Revisiting your insurance coverage

When you first signed up for insurance policies in your 20s or 30s, you probably didn't have as many assets or find yourself involved in as many personal liability issues as when you're older. That's why periodically reviewing your insurance policies as part of an overall financial health checkup is important. During that checkup, you might find that an umbrella policy can ensure you have enough protection for your family and your assets, so you can continue your way of life in the event of a lawsuit or other liability exposure.