Do I Need Umbrella Insurance?

Piggy bank standing on a edge of a cliff in rain and covered by green umbrella
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Umbrella insurance protects your assets if you are sued for an accident or something else catastrophic happens. It will cover expenses over the limits of coverage you have on your car and home insurance.

It is easy for medical bills to add up to more than your coverage limits, especially if there is more than one person involved in the accident. Umbrella insurance should not take the place of your car, home, or business insurance, if applicable. Instead, you should consider it to be supplemental insurance that you add to other coverage. 

Do I Need Umbrella Insurance?

Most people who are just starting out in a career do not need umbrella insurance. Once you purchase a home or begin to build assets, you should consider buying it. And if you own a small business or have accumulated significant wealth, you almost certainly should buy it.

One sign it is time to buy umbrella insurance is, you have more in savings than your current homeowners or auto policy will cover for injury.

You can purchase an umbrella policy at the same time you purchase your other kinds of insurance. This practice is known as bundling and can often help you save money on your premiums.

If you own your own business, an umbrella policy will supplement the business insurance you should have in place. Court judgments can be a lot bigger for businesses than they would be for individuals. One small accident on your business property may be enough to shut you down permanently.

As your business grows, you may want to increase your coverage. You can talk to your insurance agent to determine whether you need more coverage. A financial planner may also be able to advise you on the amount of coverage you need to protect your assets.

When Should I Get Umbrella Insurance?

Umbrella insurance becomes more important when you have built wealth and bought assets. Until you do this, you likely do not need to worry about getting the extra insurance. If you work for an employer, are a renter, and have only a small nest egg, you probably do not need umbrella insurance yet. 

As you take on additional responsibilities, perhaps a spouse and children or a company you have started, you will have a wider variety of insurance needs. It is important to take the time to think about making insurance adjustments as you go through each of the six major financial steps in your life (getting married, getting out of debt, buying a car, buying a home, finding the right career path, and investing your money) as well as to just reflect on your situation each year.

As long as you have a record of making your payments and filing very few claims, you may be able to save money on your insurance if you change providers every few years.

Your insurance agent can help you recognize when you need a higher level or a different kind of coverage. For instance, once you have dependents, you should buy life insurance. And the final piece of coverage you will need may be an umbrella policy.

As your expenses and assets grow, your coverage amount likely needs to grow as well.

How Does Umbrella Insurance Work?

Umbrella insurance is not a primary insurance policy. It is a secondary policy that kicks in after you have reached your policy coverage limit. It usually goes into effect when you are sued for large amounts of money after a serious accident. When you are being sued, the company that you have umbrella insurance with should work with any other insurance company you have a policy with to help you fight in court and protect your assets.

You may choose to have your umbrella insurance with the same company as your other insurance policies. This can simplify the process if you are sued.

Prior to buying an umbrella policy, you should research potential insurers to make sure they have a track record of protecting policyholders and fighting claims against them.

The premiums for umbrella insurance are often a good deal less expensive than for a comparable increase in coverage from your home and car insurance since the umbrella policy is used far less often. An umbrella policy offering $1 million in coverage typically costs only $150 to $300 a year, according to the Insurance Information Institute. The second million dollars in coverage might cost you only $75 more a year, and you might pay only $50 a year for each additional million dollars in coverage.

In return for a low premium for a $1 million policy, your umbrella insurer will expect you to have a good deal of primary coverage in place: $250,000 for your car and $300,000 for your home.