What Is Umbrella Insurance, and How Does It Work?
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Umbrella insurance is extra liability insurance beyond what’s on your existing policies.
An umbrella policy can pay what you owe if you’re at fault for someone else's injuries or property damage.
The cost of umbrella insurance typically starts around $200 per year for $1 million of coverage.
Nobody’s perfect. That’s why you buy liability insurance: You can avoid financial ruin if you accidentally cause major injuries or property damage to others. But your insurance isn’t perfect, either. That’s where a personal umbrella insurance policy comes in.
What is umbrella insurance?
Umbrella insurance — sometimes called personal liability umbrella insurance — is protection for your savings and other assets. It provides extra liability coverage beyond the limits on your existing policies, such as car or homeowners insurance. If you're at fault for injuries or damage and your other policies aren't enough to cover the costs, an umbrella policy helps pay what you owe.
Umbrella insurance is similar but not necessarily identical to excess liability insurance. What’s the difference? Excess liability coverage typically provides a higher liability limit on the policies you already have, while umbrella insurance may also add coverage for circumstances your underlying policies don’t include.
For example, umbrella insurance may pay for legal fees and damages if someone accuses you of slander (a false spoken statement) or libel (a false written statement). A typical homeowners insurance policy doesn’t offer this coverage.
Umbrella and excess liability policies vary from one company to another. If you’re confused about your coverage, reach out to your insurance company or agent.
How umbrella insurance works
Umbrella insurance offers extra liability coverage if you exhaust the limit on an underlying policy. Here’s an example of how it could work:
You run a red light and T-bone another car. There's significant damage to the vehicle, and several people are injured. The car needs $25,000 in repairs, and treatment of the injuries totals $275,000. Plus, the driver of the other car is an orthodontist who won’t be able to work for months due to a broken arm. She sues you for $200,000 in lost earnings.
You’re on the hook for a total of $500,000. If you carry only $300,000 in liability coverage with your car insurance, the remaining $200,000 will have to come out of your pocket.
If you had umbrella insurance, it would pay the difference between what your primary insurance covers and what you still owe. An umbrella policy could also cover your legal costs in the lawsuit.
What does umbrella insurance cover?
Depending on your policy, umbrella insurance can cover you and members of your household against claims or lawsuits for things like:
Injuring someone else.
Damaging someone else’s property.
Defamation.
Landlord liability.
False imprisonment.
In addition to paying damages up to your liability limit, your umbrella insurance will typically also cover associated legal costs beyond that amount. Say you have an umbrella policy with $1 million of liability coverage, and someone sues you for that full amount. If a court finds you liable, your insurer could pay the $1 million plus provide your legal defense.
You might have to pay a "retained limit," which is similar to a deductible. It’s an amount you’ll have to cover before your policy begins to pay.
Details and exclusions can vary significantly between umbrella policies, but here are a few sample scenarios that would often be covered:
Your teenage son gets into a car accident, and the cost of injuries to other drivers is above your auto insurance liability limit.
A houseguest falls down your stairs and sues you for her medical bills plus pain and suffering, exceeding your homeowners insurance liability limit.
A restaurant sues you for writing a negative review online.
What umbrella insurance doesn’t cover
Umbrella insurance doesn’t cover your own injuries or property damage — you’ll need other types of coverage for that (such as health insurance or collision coverage on your auto insurance). Nor will it cover liability associated with your business unless you have a business umbrella policy rather than a personal one.
Most umbrella insurance policies won’t cover liability stemming from the breach of a contract you’ve entered into. Say a roofing company sues you because you haven’t paid for the work it’s done under the contract you signed. Your umbrella insurance policy is unlikely to help. And if you hurt someone deliberately or commit a crime, you’re almost certainly not covered.
Boats are another common area of exclusion. Some companies cover certain sizes or types of watercraft only. Others don’t cover them at all unless you have an existing boat insurance policy.
Umbrella insurance usually covers | Umbrella insurance usually doesn't cover |
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Who needs umbrella insurance?
There’s no law requiring you to buy umbrella insurance. But if you have a lot of assets or a high chance of being sued, you might want an umbrella policy. It might be worth buying umbrella insurance coverage if you:
Own property.
Have significant savings or other assets.
Are worried about liability claims against you when traveling outside the U.S.
Own things that can lead to injury lawsuits such as pools, trampolines, guns or dogs. (Check with your insurer to make sure the policy covers your dog’s breed.)
Are a landlord.
Have an inexperienced driver in your household.
Coach kids’ sports.
Often host parties in your home.
Serve on the board of a nonprofit.
Regularly post reviews of products and businesses.
Take part in sports where you could easily injure others (such as hunting, skiing or surfing).
Are a public figure.
How much umbrella insurance do you need?
It’s wise to have at least enough liability insurance to cover your assets. To decide how much umbrella insurance coverage you need, add up the value of your property, savings and investment accounts. Then, take a look at the liability insurance you already have through your existing policies and buy enough umbrella insurance to make up the difference.
You may also want to consider potential income if you’re likely to earn much more in the future than you do now — if you’re a medical student, for example.
When considering potential lawsuits, keep in mind that employer-sponsored retirement accounts such as 401(k)s are protected from most lawsuits under the federal Employee Retirement Income Security Act of 1974. IRAs aren't, except for funds rolled over from an employer-sponsored account.
However, state laws may offer some protection for your IRA accounts and the equity you have in your home. Check your local laws before deciding how much umbrella insurance you need.
Insurers typically sell umbrella insurance in million-dollar increments. This means the cheapest policy available provides $1 million in coverage, the next-cheapest policy offers $2 million in coverage, and so on — so you get a decent amount no matter what you choose.
» MORE: The best financial advisors to grow your assets
How much does umbrella insurance cost?
The cost of an umbrella policy starts around $200 per year, with an average cost of about $380 for $1 million of coverage, according to Trusted Choice, a network of independent insurance agents. With its high coverage limit, umbrella insurance generally offers good value for the cost. However, you may also end up paying more for your other insurance policies if you need to increase your liability coverage to meet the minimum limits required for umbrella insurance.
How to get umbrella insurance
Your first step is to call your existing insurer. If you’ve already got homeowners and auto coverage with a certain company, see how much it would cost to add umbrella insurance on top of those policies.
That said, it’s always a good idea to shop around. Consider getting quotes from at least two other insurers to make sure you’re getting the best combination of coverage and price. An independent insurance agent can shop around on your behalf.
Learn how to find the best umbrella insurance.
Bottom line: Is umbrella insurance worth it?
If no one ever sues you or files a large liability claim against you, you could end up paying thousands of dollars for umbrella insurance without any benefit. But if you do need the coverage, it could save you $1 million or more and keep you from losing your home and investments.
Not everyone needs umbrella insurance. But for those with significant assets or a high lawsuit risk, it can offer both financial protection and peace of mind.
Provides extra liability coverage and legal defense costs once the limits of your auto, home or other underlying policies have been exhausted.
Covers incidents that your main insurance might not, such as libel and slander.
The cost is relatively low compared to the potential payout.
Coverage often applies anywhere in the world.
May cover certain rental items for which you don't have insurance, such as a boat.
You must already carry auto or property insurance, usually homeowners, to qualify.
You may need to have the umbrella policy and all underlying insurance with the same company. This reduces your ability to shop around for better rates on individual policies.
Your total premium costs may go up if you need to add extra liability coverage to your existing policies. (You typically need a minimum amount of liability insurance on underlying policies in order to add umbrella coverage.)
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