What is an “Umbrella Policy,” and Do I Need One?

Do you need to purchase home insurance when you buy a property?

You should – just about every mortgage lender will need to see proof of property insurance in order for a loan to be approved. And even if you don’t need or have a mortgage, having home insurance is definitely money well-spent in case your home is ever burglarized, vandalized, or is victim of a flood or fire.

But what about an umbrella policy? This isn’t exactly a mandatory expense. In fact, this might be a foreign concept to many homeowners.

It’s totally up to you whether or not to buy an umbrella policy. Here is some advice to help you decide whether or not this purchase is one you should make.

Umbrella Policy – Defined


First of all, let’s talk about what an umbrella policy is. Essentially, this policy offers purchasers additional liability coverage beyond typical home or auto insurance.

Not only does it protect your physical home and the belongings within it, it also protect other assets, including your investments, savings accounts, retirement fund, and even your future earnings from any major claims or lawsuits as a result of an accident that you are responsible for. An umbrella policy can even protect your name from being slandered.

So, if your liability coverage doesn’t totally cover any damages of an accident or incident on your property that you’re responsible for, an umbrella insurance policy will kick in where your other liability coverage has left off. Basically, an umbrella policy is designed to protect you when your auto or home insurance simply isn’t enough.

How Exactly Does an Umbrella Policy Work?

Let’s illustrate by example how an umbrella policy would take action in certain circumstances.

If you are involved in a car accident which was entirely your fault, and the other driver was injured, your current auto insurance will cover the other driver up to whatever limit you chose for your policy. If, for example, you chose $200,000, that’s how much the other driver will be covered for.

But if $200,000 isn’t enough to cover this expense, you could be sued for the amount over and above what your current auto insurance policy covers. That means your personal assets could be vulnerable for the taking.

Where exactly are you going to come up with that extra cash to cover what the other party is demanding? If you had an umbrella policy, these additional costs would be covered so that all of your assets would be protected.

Another example would be an incident on your property resulting in injury to another person. Let’s say you neglected to adequately shovel your driveway or de-ice your walkway. Should a postal service worker approach your front door to deliver mail, and slips and falls during this trek, he or she could sue you for injuries over and above what your current liability policy covers you for.

An umbrella policy would come into the picture to pick up the slack in this case.

How Much Does an Umbrella Policy Cost?

You can expect to pay anywhere between $150 and $300 a year for a $1 million umbrella policy. Homeowners can purchase these policies in $1 million increments, typically up to $5 million. The second $1 million will usually cost about $75 a year, then about $50 a year for every $1 million that follows.

There are certain factors, however, that could affect how much you pay for your policy, including:


▪          Your job

▪          Your driving record

▪          Your hobbies

▪          Pets

▪          Prior lawsuits

Factors Not Covered Under an Umbrella Insurance Policy

Even though an umbrella policy can protect you under a variety of circumstances, there are certain lawsuits that it won’t protect you against, including:

▪          Malpractice lawsuits

▪          Damage caused by business-related activity

▪          Intentional damage you cause to any person or property

▪          Workers compensation claims

An umbrella policy also does not cover you if you’re actually the one harmed and require an expensive medical procedure. In this case, you’ll have to depend on your health insurance to flip the bill for these expenses.

Should You Buy This Policy?

All homeowners and retirement fund investors should seriously consider buying an umbrella policy. But even those without such assets should consider buying it. Think about other assets that you might own – like your car, savings account, and your future paychecks that are at risk if you’re ever slapped with a lawsuit.

At the end of the day, if you’re involved in any activity or possess anything that could put you at an increased risk for liability, an umbrella policy can help bail you out of financial hot water.