Understanding Personal Liability Umbrella Policies: Protecting Yourself Beyond the Basics
Key Takeaways:
A personal liability umbrella policy doesn’t increase the limits of your underlying policies. Instead, it adds a separate layer on top of your limit.
Umbrella and excess insurance are often used interchangeably but differ.
An umbrella insurance policy is a cost-effective option for providing your family with more significant financial protection, starting at around $200 for a $1 million policy.
Insurance policies are critical to any well-rounded financial plan, as they can protect your hard-earned assets from unexpected events—car accidents, property damage, and more.
But depending on your lifestyle or line of work, your standard insurance policies (like home and auto) may not provide enough coverage for your assets. A lack of adequate coverage exposes your net worth to more risk than you may realize, especially if you’re sued or otherwise found liable for someone else’s injuries or property damage.
One affordable and straightforward option to better protect yourself is to obtain a personal liability umbrella policy, often called an “umbrella policy” for short. Let’s look at what this policy covers, who should obtain it, and how to get started researching potential policies.
What Is a Personal Liability Umbrella Policy?
Let’s start first with what personal liability and liability insurance are. “Personal liability” means paying another party because you have been found responsible for some negligent act. Standard personal liability issues include property damage, personal injury, and other general damages.
Liability insurance can help you cover a personal liability lawsuit's legal costs and payouts. Most homeowners and auto insurance policies provide a liability component, which offers limited protection up to a certain amount.
Many people, especially high-earners, high net worth, or public figures, find their current liability coverage too limiting or too low to provide comprehensive coverage. That’s where personal liability umbrella policies come into play.
Jeff Mason (CPRIA) from Marsh McLennan Agency, describes umbrella policies as follows:
"Umbrella insurance policies don’t increase your existing coverage limits; instead, they provide an additional layer of protection that goes over those limits. Essentially, they act as a separate policy offering extra coverage beyond your primary insurance."
An umbrella policy adds to your underlying policies, including home, renters, auto, boat, and motorcycle insurance. Sold in $1 million increments, an umbrella policy provides a higher limit and broader coverage than what your existing policies can offer. Generally speaking, an umbrella policy will cover you and your family (including pets) but will not protect you from lawsuits stemming from intentional acts (like burglary, cyberhacking, trespassing, etc.)
What Is and Isn’t Covered Under a Personal Liability Umbrella Policy?
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-Injuries including medical expenses and loss of income
-Funeral expenses
-Property damage to others’ cars, homes, and other assets
-Lawsuits relating to:
-Slander and libel
-Defamation of character
-False arrest
-Detention
-Invasion of privacy
-Imprisonment
-Malicious prosecution
-Shock or mental anguish
-Wrongful eviction or entry
-Legal defense costs
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-Your injuries
-Damage to your property
-Injuries or damage arising from your business activities
-Liability associated with contracts (written or oral) you’ve entered into
-Intentional or criminal acts
Umbrella vs. Excess Liability
Umbrella and excess insurance are often used interchangeably, but they are different.
Excess insurance only provides a higher limit on instances already covered by the underlying policy. An umbrella policy, on the other hand, is more comprehensive. It typically extends and expands what’s covered in your underlying policy. It may incorporate and cover certain circumstances (like dog bites from aggressive breeds) that your original policy doesn’t.
Who Should Consider an Umbrella Policy?
Umbrella insurance offers protections for several common scenarios not covered by other policies. Because it incorporates fewer limitations and isn’t limited to U.S.-based coverage, it can be used to protect policyholders against many liabilities and risky scenarios, including:
Traveling abroad
Coaching kids’ sports
Hosting parties at your home
Owning property that may injure others
Pool
Trampoline
Guns
Horses, dogs, or other animals
Being a landlord
Vacation rentals
Some insurance providers don't cover vacation rentals, so be sure to check if it’s included if it’s something you need.
Employing household staff
Serving on the board of a nonprofit organization
Being a public figure
Managing a family trust
Posting online reviews of products, services, and businesses
Having an inexperienced driver in your home
This is not an exhaustive list, but if you find that any of these possible scenarios apply to you or your family, you may benefit from the additional coverage provided under an umbrella policy.
Why You Need a Personal Liability Umbrella Policy
Inadequate liability coverage can impact your entire financial picture. Depending on the circumstances, an uninsured accident or injury could put you on the hook for thousands—even millions. Unless your emergency savings can cover the full cost, such an expense may require you to borrow against your retirement savings, dip into your investments, or otherwise risk your current and future financial security.
Having more comprehensive coverage than what your underlying policies provide can bring you greater peace of mind—especially if you relate to any of the scenarios listed above.
Determining How Much Coverage Is Right For You
Exactly how much umbrella coverage is appropriate for you and your family will depend on several factors. A common rule of thumb we see in discussions about liability insurance is to obtain a policy equal to your net worth since that’s what’s at risk should you encounter a lawsuit.
In reality, what you’re insuring isn’t your assets, but your exposure to potential loss. For example, you could have a $5 million net worth and a $5 million umbrella policy but be sued for $10 million and lose. If you or a family member engage in higher-risk activities or have higher exposure to lawsuits, that should dictate the level of coverage you need.
You can also factor in potential future income loss when considering how much coverage you need. This can be especially important if you have a high future earning potential (like a doctor or lawyer), as liability lawsuits may claim future earnings in addition to current assets.
Keep in mind that some of your assets are protected from lawsuits, including your:
401(k) or other employer-sponsored retirement plan
IRAs rolled over from an employer-sponsored plan
Social Security
Annuities
Home equity (depending on your state)
Traditional and Roth IRAs may also be protected up to a certain amount, depending on your state laws.
Assets that are subject to liability lawsuits and therefore considered unprotected include:
Brokerage accounts
Saving and checking accounts
Garnished wages (depending on the state)
To be confident in your level of protection, have a conversation with your financial advisor and insurance broker to determine what’s appropriate for your circumstances.
How to Obtain a Personal Liability Umbrella Policy
If you want an umbrella policy, check with your auto insurance provider first. See if they allow you to add umbrella insurance to your existing policies, how much it would cost, and what additional protection it provides.
Typically, your underlying policy or policies must have minimum liability insurance to qualify for additional coverage—usually around $300,000 on homeowner policies and $250,000 on auto insurance policies.
The most effective way to obtain umbrella insurance is to bundle it with your existing home and auto policies. But if your current provider doesn’t provide this option, you can search for stand-alone coverage.
In addition, we always recommend talking to an independent insurance broker who can compare umbrella policies to ensure the proper exposures are covered because all policies are unique. Our North Ridge Wealth Advisors team can help connect you with an independent insurance broker for a free review of your current coverage to identify potential gaps that umbrella insurance can cover.
Whether you purchase coverage through your existing insurer or a separate company, review the policy closely for limits and exclusions.
How Much Does an Umbrella Policy Cost?
The cost of your policy will depend on a few factors. For example, an individual with one house, two cars, and two adult drivers will pay less for coverage than someone with multiple homes, a boat, three or four cars, and a teenage driver.
The price can also depend on who your coverage is through. For example, a standalone umbrella policy will likely be more expensive than one through your current insurance provider. This is simply because it’s more expensive for the provider to defend any claims if you’re not utilizing them for other forms of coverage.
We’ve seen umbrella policies go for around $350 for $1 million in coverage. However, it’s not unheard of for someone to pay closer to $550-$600 when covering a significant amount of assets and liabilities (or younger drivers).
From a Beneficiary’s Perspective
“In the summer of 1993, three days before I was headed off to college, my friends and I were driving along a stretch of highway up to Mt. Hood to go hiking.
A driver in the opposite lane fell asleep at the wheel and drifted into our lane, slamming into us at full speed. In total, three cars and 13 people were involved in the accident. I broke my back, the girl next to me shattered her spine and skull, and other passengers suffered severe injuries. Emergency personnel arriving on the scene expected to find multiple fatalities.
This took place in Oregon, where, like many states, the minimum required insurance is $25,000 per person or $50,000 per accident—which would not be enough to cover all damages and injuries in such a severe accident. My parents, thank goodness, had the foresight to purchase a $1 million umbrella policy with a rider that covered us if another driver was uninsured or underinsured (as was the case here).
This is why I’ve always advocated having umbrella coverage. It’s affordable and protects against the worst-case scenarios that could otherwise financially devastate a family like ours. And I’ve since seen clients be saved financially by an umbrella policy we insisted they get.”
- Adam Cornwell, Partner, North Ridge Wealth Advisors
Assess Your Insurance Needs
You never know when an unfortunate event will happen—you injure a swimmer in a boating accident, cause property damage in another country, a child breaks their leg on your trampoline… you name it.
While you hope never to have to use it, umbrella insurance can provide people (especially those at risk of a liability lawsuit) with a broader spectrum of coverage and some much-needed peace of mind. Simply put, it’s a simple, cost-effective option providing additional protection for many people.
We encourage you to assess your current insurance coverage and consider where gaps may exist. If you need help determining if a personal liability umbrella policy is right for you and your family, don’t hesitate to contact our team today.
Always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any rates of return are historical or hypothetical in nature and are not a guarantee of future returns, which may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions and security positions, when sold, may be worth less or more than their original cost.