Personal umbrella insurance is a type of liability insurance that goes above and beyond the coverage provided by other policies. Most people do not need personal umbrella insurance – although certain individuals can benefit from it.
Today, we’re explaining everything you need to know about personal umbrella insurance – including whether or not you need it.
What is Umbrella Insurance?
Umbrella insurance is a type of liability insurance that is in excess of other insurance policies.
Let’s say you owe somebody money because of an insurance claim (you’re liable to someone). In this case, your primary insurance policies will pay up to their limits. Then, any additional claims will be paid by your umbrella policy (up to the limit of your umbrella policy).
Umbrella insurance is similar to excess insurance in that both policies pay after an underlying primary policy is exhausted.
Umbrella Insurance Versus Excess Insurance
So what’s the difference between umbrella and excess insurance? Excess policies normally cover the exact terms outlined in your primary insurance policy. They’re “follow form” policies. They cover the exact same conditions as your primary policy – they just cover more of it.
Umbrella policies, on the other hand, sometimes cover a broader range of items than primary policies. They may be specifically designed to cover things that are not covered by your primary policy, for example.
What is Personal Umbrella Insurance?
Personal umbrella insurance is a specific type of umbrella insurance. Personal umbrella policies specifically supplement a person’s homeowner’s insurance and their auto insurance.
Personal umbrella insurance policies are not very common. The most popular umbrella insurance policy customers are high net worth individuals.
State Farm is the largest personal insurance company in the United States. Approximately 12% of State Farm’s customers purchase umbrella coverage.
How Much Does Personal Umbrella Insurance Cost?
Personal umbrella insurance provides additional coverage above and beyond your home and auto insurance policies. However, it doesn’t increase the cost of your insurance as much as you might think.
If you currently pay $7500 per year for home and auto insurance on a $1 million home and two cars, for example, then $5 million of umbrella insurance from State Farm would raise the cost by about $600 – or approximately 8% of the total – according to an insurance expert interviewed by the NY Times.
Umbrella insurance doesn’t cost as much as you might think for a simple reason: the first million dollars in coverage is typically the most expensive, with coverage costs declining from that point upward, up to $10 million in coverage. After $10 million in coverage, rates jump because so few people purchase that much coverage, which means insurers must spread out the costs among a smaller pool of customers.
Of course, prices vary widely between insurers. Talk to your insurer about personal umbrella insurance to see if it makes sense for you.
Should You Buy Personal Umbrella Insurance?
Personal umbrella insurance is typically seen as a policy option for high net worth individuals. However, it can be purchased and used by anybody.
Approximately 4 out of 5 personal umbrella policy claims are related to auto accidents. The majority of claims were not initially covered by the claimant’s primary policy. Once you’ve maxed out your insurance money, you’re personally liable for any remaining claims – which means you either need to depend on an umbrella policy or pay out of pocket (or declare bankruptcy).
Insurance salespeople will happily tell you stories about clients who have caused injuries in vehicle accidents, then were sued for huge damages. You might cause severe injuries to another driver and their family, for example, and be sued for $5 million in medical expenses and lost wages. Your standard car insurance policy might only cover the first $1 million in damages, but an umbrella policy (assuming it’s worth at least $5 million) would cover the whole thing.
It’s also important to note that umbrella policies don’t just provide excess coverage. They provide additional coverage beyond the terms of your policy.
For example, umbrella policies for homeowner’s insurance may cover things not typically covered under your homeowner’s insurance plan, including:
- False arrest
- Invasion of privacy
Umbrella policies first emerged in the 1940s and became popular during the 1960s. Today, approximately 5% to 15% of insurance policyholders will purchase umbrella insurance – including personal umbrella insurance that supplements your homeowner’s insurance or auto insurance.
Talk to your insurance company to see if an umbrella policy is the right choice for you. If you feel under-insured, or if you’re worried about being exposed to liability in the future, then umbrella policies can give you peace of mind at a surprisingly affordable cost. Personal umbrella insurance does more than just raise the amount of money available as compensation: it widens the terms of your insurance policy so that it covers more things. That can significantly reduce your liability in the event of a car accident or other unexpected event.