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What Is Umbrella Insurance?

What is the first thing you think of when you hear the term umbrella insurance policy? If you thought additional insurance coverage, you’re absolutely right.

An umbrella insurance policy helps bridge a gap that may exist under a traditional insurance policy by providing additional coverage. If you already have an existing home or auto insurance policy, why would you need additional coverage?

Believe it or not, an existing home or auto insurance policy does not cover everything. 

What Is an Umbrella Policy?

First and foremost, what is an umbrella policy? Simply put, an umbrella policy is additional insurance one can buy to increase their insured amount.

This is defined as the excess in liability coverage. For example, you may have auto insurance that covers up to $300,000 in liabilities.

Whereas $300,000 is more than enough to cover slight damage to a car and even some property damage, if you are at fault causing serious injury to someone, you can quickly exceed the $300,000 coverage threshold. An umbrella policy is additional insurance one can purchase that will cover the insured beyond $300,000.

For instance, someone may have an umbrella policy that provides an additional $1,000,000 of coverage once they exceed the max coverage their primary insurance policy provided. 

How Does Umbrella Insurance Work?

Now with a better understanding of what this policy is, let’s unpack how exactly umbrella insurance works. Firstly, it is optional coverage one may choose to purchase.

This type of insurance policy is activated once the primary insurance liability coverage is capped out. For instance, following the auto insurance example above, if someone caused an at fault accident and was sued for $500,000 in damages and injury, their auto insurance would absorb $300,000 of that bill.

If the driver carried an umbrella insurance policy that provided an additional $200,000 in liability coverage, the driver would not be personally responsible for covering the $200,000 gap in coverage. Rather, the policy would kick in and absorb the difference. 

What Does Umbrella Insurance Cover?

What exactly does this kind of policy cover? Many things!

It provides coverage for injuries, personal liability situations and damage caused to property. It is most relevant in the auto insurance and homeowners insurance arena.

Common expenses that would be covered include:

  • Medical bills, expenses, and treatment for the injured party. 
  • Legal fees. 
  • Lawsuit expenses.
  • Injuries caused on your property (If you rent property to others, this is very important!). 
  • And even funeral costs. 

What an Umbrella Policy Does Not Cover

It’s important to understand an umbrella insurance policy is not a primary insurance policy. You cannot purchase it if you do not have underlying primary insurance, such as auto or homeowners insurance. 

The following are examples of what an umbrella policy doesn’t cover:

  • Injuries to the insured.
  • Intentional crimes or criminal acts; For example, if you intentionally injured someone on your property, umbrella insurance would not kick in. 
  • Damage to one’s personal belongings. Similar to the above, it does not cover the expenses for your personal belongings. This is liability coverage. 

Is Umbrella Insurance Right for You?

Who needs this type of insurance? Truthfully, anyone who owns a home, business, or drives a car.

As much planning as we do in life, no one can predict the future. Horrific accidents and injuries can happen, and if they do, you’ll be glad you have an umbrella insurance policy. 

How Much Umbrella Insurance Do I Need?

One’s needs can vary. Generally speaking, you want to have a surplus of umbrella insurance to protect your assets. 

The more assets you have, the more you have at risk of loss. Therefore, you’ll want to have enough insurance to ensure you are never in the position to lose any of your assets. 

How Much Does Umbrella Insurance Cost?

Luckily, umbrella insurance is affordable! The price however is contingent on how much coverage you sign up for.

You can have $1 million dollars in coverage for roughly $300 a year! 

Example of Umbrella Insurance 

An umbrella insurance policy can be used in a variety of situations and accidents. Let’s review this example of where a homeowner can benefit from having this extra coverage.

Jane and John own a home and have two dogs. One day they invited their neighbors over for a barbeque, and one of the dogs viciously attacked the neighbor.

The neighbor survived the attack but had serious injury to his face. Jane and John had homeowners insurance which covers up to $250,000 of liability expenses.

However, the neighbor needed serious facial reconstruction surgery and the hospital bills exceeded $500,000. If Jane and John had an umbrella homeowners insurance policy, the policy would kick in once the traditional homeowners insurance policy hit its $250,000 limit.

Although no one wants to think about the horrific accidents when an umbrella insurance policy would be useful, these accidents do occur, which makes carrying this insurance worth the low yearly premium. 

Common Phrases With Umbrella Insurance

Insurance lingo can be confusing! Here are some typical insurance jargon and the meaning. 

Pay on Behalf

Pay on behalf is when an insurance company agrees to pay on behalf of the insured. For instance, if one needed to use their umbrella insurance policy, the insurance company would pay the person suing the insured. 

Coverage Trigger

The coverage trigger is the event that must occur for the insurance liability policy to kick in and apply to a loss. The coverage trigger will be explained in greater detail in an insurance policy, and will outline exactly what events, or examples, would trigger the coverage. 

Self Insured Retention Clause (SIR) 

A self insured retention clause is insurance one can have in place in case their primary insurance did not cover a specific event. For example, imagine if your homeowners insurance did not cover the expenses associated with someone slipping and falling on your property (this is just an example, homeowners insurance covers this).

If you had a SIR, your SIR would pay a specific amount of this expense, and then your umbrella policy would kick in. It’s effectively a work around in case your primary insurance did not cover specific accidents or expenses. 

Advantages of Having Umbrella Insurance

Some of the most appreciated advantages of an umbrella policy include:

  • It’s rather inexpensive considering the amount of insurance coverage you get. 
  • It’s not difficult to exceed the liability coverage a of your standard insurance, and if/when that is exceeded, you’ll need the extra coverage. 
  • Coverage travels with you. If you casued an accident in another country, you can still be covered. 

Disadvantages of Umbrella Insurance

Some of the disadvantages include:

  • Ideally, this insurance won’t be necessary.
  • If you do not have many assets, many people question if additional coverage is useful. 
  • Does not cover damage you created to your own property. 

How To Buy Umbrella Insurance

Buying is easy. Plenty of well-known, reputable, insurance companies offer an umbrella insurance option. You can contact a local insurance agent or even apply online. 

Umbrella Insurance vs. Traditional Insurance Policies

If you own a house or drive a car, you must carry homeowners and auto insurance. This required insurance is also known as traditional insurance.

Traditional insurance provides coverage up to a specific amount. Umbrella insurance is additional, optional insurance that adds coverage to an existing policy.

For example, if your auto insurance covers $250,000 in liability coverage, an umbrella insurance policy would cover expenses beyond $250,000 up to a predetermined higher amount – depending on how much coverage you wish to purchase.  

Insurance That Goes Above and Beyond 

Although no one ever wants to have to use their umbrella insurance policy, it’s fantastic to have if you ever need it. Traditional homeowners or auto insurance typically provides a few hundred thousand dollars in liability coverage.

In today’s world, it’s not difficult to have someone rack up that much in medical expenses if serious injury occurs. An umbrella policy will provide additional coverage, above and beyond what your traditional insurance policy covers.

This additional insurance coverage can protect your assets if in fact the coverage ever needs to be used.