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When does it make sense to have umbrella insurance?

An umbrella insurance policy can provide coverage for unanticipated situations like lawsuits that may not be covered by other insurance policy options.

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You likely know many of the ways to potentially build wealth — invest in a retirement plan, buy a home, have a savings strategy, and keep track of long and short-term financial goals. But how much thought have you given how to protect your money?

Even if you think it could never happen to you, financial risks, such as a lawsuit, are a hypothetical what-if that may be worth imagining. An umbrella policy is one tool that can potentially protect your assets.

What is an umbrella policy?

An umbrella policy isn’t a popular financial topic like budgeting and investing. Most people have never heard about an umbrella policy. Simply put, an umbrella policy is just as it sounds. It’s a secondary policy of excess liability that acts as an umbrella on top of insurance policies you already own, such as your car, homeowner’s, or renter’s insurance. Because these policies have limits, they may not fully cover a catastrophic event, like a car accident or extensive property damage. An umbrella policy can be tapped to pay the difference between the limit of the primary insurance and any claims, so your personal assets aren’t affected.

If you’ve got assets, it may be a good idea to think about adding an umbrella policy to your insurance portfolio to protect from liability exposure in the event you were sued for something happening on your property or if you cause injury to someone else. Most experts suggest considering an umbrella policy if your assets exceed the amount of liability coverage on your car and homeowner’s insurance.

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When do you need an umbrella policy?

An umbrella policy typically comes into play in one of two ways: Either the limit of your primary car, homeowner, boat or other insurance isn’t sufficient to cover a claim, or the insurance options you do have don’t apply to the situation, such as a lawsuit filed against you.

There are lots of reasons why you should think about an umbrella policy and what one covers:

  • Bodily damage from an at-fault car accident. Of course, your car insurance would provide a benefit to the injured party, but up to certain limits. For instance, if their medical bills totaled $450,000 and your car insurance only covered $300,000, you’d be left to pay the difference. However, if you had a $1,000,000 umbrella policy, it would provide the extra $150,000 you needed to cover the liability gap.
  • Property damage to someone else’s house or stuff. Your child goes Kandinsky on a museum Monet. Your dog pees on your neighbor’s mid-century modern couch. You rent a boat and damage a pier on vacation. Whatever the incident is, an umbrella policy can provide additional coverage.
  • Covers legal fees and court costs in the event you were sued. An umbrella policy can be used in the event you were sued for a host of reasons. This applies to libel or slander cases as well — for instance, you say something negative about an acquaintance on social media or defame their character, an umbrella policy could likely cover the cost of an attorney for you.
  • Bodily damage to someone else. Of course, you’re not intending to hurt anyone, but accidents happen, and umbrella insurance can be tapped for things including dog bites and slips and falls around your home and property. It can be smart to look at the liability limitations for your home or renter’s insurance to know what is and isn’t covered under that policy to help you assess how much umbrella insurance you may need.

Unlike life insurance or disability insurance, an umbrella insurance policy usually covers more than the individual named on the policy. An umbrella policy usually covers your spouse, any relatives or dependents who reside with you, as well as anyone who may borrow your car, including a friend. Common exclusions on an umbrella policy may include not covering injuries that occur to yourself, personal property damage, or intentional or criminal acts. Reading the fine print on the policy to know exactly who and what may be covered can help give you peace of mind.

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Where to start looking for an umbrella insurance policy

Often, the easiest place to begin your search for an umbrella policy is through the same company as your car or homeowner insurance. You may also be able to bundle the policy with your existing policies as well, which can simplify the bill paying process and may give you an option for a discount.

How much will you pay for your umbrella insurance policy? That depends, but these policies can be relatively inexpensive compared to other insurance coverage. Umbrella policies are usually sold in increments of $1,000,000, and rate quotes depend on factors including your current home and auto coverage and your exposure to risk.

As with any insurance policy, it can be a good idea to compare quotes and choose the plan that makes the most financial and practical sense for you and your family.

Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER®  professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money. Opinions expressed by the author are their own.

Haven Life doesn’t provide tax, legal or investment advice. This discussion is intended as general education only. We encourage you to work with your own personal tax or legal professionals and your financial advisor. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

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About Shannah Compton Game

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Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus.html

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