Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Oct 21, 2021

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Umbrella insurance, formally known as a personal umbrella policy, is one of the best and cheapest insurance policies on the market.

Unfortunately, it’s also one of the most undersold policies in insurance. Many people think that if they aren’t going to need to file claims, or that they won’t require a certain amount of coverage, then there is no reason for them to look into bundling. However, if a person has various types of property that need to be insured, chances are they could be saving money with an umbrella policy. Typically an insurance agent will ask you if you need any extra protection when you sign up with a company, but you may want to mention the items and property that you need insured, just in case they don’t.

With an umbrella policy, a customer could end up having less expenses even though they have more coverage. In fact, an umbrella policy can cost as little as $15 per month for $1,000,000 dollars in coverage.

Let’s learn more about it to determine if it’s something worth buying.

What is umbrella insurance?

First let’s define what umbrella coverage actually is. No, were not talking about insuring your umbrella that always flips inside out in the wind.

Granted that’d probably be worthwhile coverage too…

An umbrella insurance policy offers high-limit liability insurance to individuals who are looking to protect their assets in the event of a major accident. When you have an umbrella policy, it means you have various types of insurance all rolled into one.

One can refer to it as extra liability insurance (or excess liability), which kind of acts like insurance for your insurance, but at a reasonable cost. Like a layer of protection that is worth the price.

It may also provide types of coverage for additional situations that your existing policies may not cover.

Umbrella policies typically start at $1,000,000 in coverage and can go up to $25,000,000 and higher for those with a lot to lose or don’t mind a higher average cost in insurance. When you have more to protect, it means if anything happened to you or your property, you’d have to file a major claim, which on its own could be incredibly expensive.

Simply put, personal umbrella coverage is designed to provide protection for the insured against high-dollar lawsuits, which are far too common these days.

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How does an umbrella insurance policy work?

If you cause a car or boat accident or someone is injured on a property you own, you can be sued for much more than the limits of your insurance.

Contrary to common insurance myths, any amount of damages awarded by a jury that exceed your insurance liability limits are paid out of your own pocket.

A personal umbrella insurance policy can be added to an existing liability policy for additional coverage or purchased separately as a stand-alone policy.

But unlike the liability portion of a personal auto or home insurance policy, an umbrella policy typically has a deductible, referred to as a “retention” limit or amount, which must be paid out of the insured’s pocket before the any damages are paid.

The amount can vary from $1,000 to several thousand dollars (or millions) depending on how large the policy is.

But paying a relatively small deductible for this level of coverage beats having your bank account drained.

What is an example of an umbrella policy option?

Let’s say you cause a car accident that results in serious injuries, with total damages coming in around $400,000.

Unfortunately, you pull out your declarations page and find that your auto policy limits are only 100/300/50. Which is pretty normal for standard policies, and you’ve probably seen those numbers thrown around a lot.

This means a maximum of $300,000 will be paid out, leaving a hefty $100,000 you’re on the hook for.

With the umbrella policy in effect, that $100,000 will be covered via deductible instead of having to be paid in full.

So you may owe $1,000 instead of $100,000. Pretty stark difference.

How much does umbrella insurance cost?

First, like any other type of insurance, it depends on what coverage options you’re buying. It also depends on what you’re insuring, and what the insurance carriers are charging. These are pretty essential elements to most policy types.

The typical umbrella policy provides $1 million in coverage, though they’re also available from many insurers for $2 million as well.

Anything higher and you might need to seek out a specialty carrier.

Now let’s consider how the premium can vary based on the stuff you’re insuring.

Are you an individual who owns ten expensive cars, two powerboats, and six properties?

Or are you one of two drivers in your household with a pair of everyday vehicles, and maybe one or two properties at most?

If you’re something like the latter, a $1 million-dollar umbrella policy may only cost around $300 (or less) annually.

That’s just $25 per month, which is a great deal of coverage for not a lot of money.

However, it’s cheap for a reason. It probably doesn’t come into play all too often, though if and when it does, it can pay off big.

For a $2 million-dollar policy, the price might be 50% more, so perhaps $450 annually, which again, is a lot of coverage for a relatively small price. You’ll want to know exactly how much of your assets will need coverage when you’re looking into what type of coverage you’ll need. Additional protection will end up being on the more expensive side, but it’s a small price to pay in comparison to what you own.

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What’s the catch?

Typically, an umbrella insurance policy will require you to have relatively high ‘underlying’ liability limits on your other policies.

For example, you may be required to carry 250/500/100 or $500,000 combined single limit (CSL) of liability limits on your auto policy.

And/or at least $300,000 liability on a homeowner’s insurance or renter’s insurance policy and at least $300,000 CSL on any owned watercraft.

Of course, it doesn’t make sense to have a $1,000,000 liability policy when you don’t already have the highest underlying limits at your disposal.

Rather than write a paragraph about the dangers of bad accidents and lawsuits, we will just point out that an umbrella policy is generally a good idea for everybody.

Whether you have a high net-worth, a 401(k), or a savings account to protect, an umbrella policy will offer you protection against the unknown and the risks associated with operating a motor vehicle or owning property.

If you have assets to protect or simply want to make sure you are covered to the highest extent possible, the umbrella policy is for you. If not, that’s no worries, as there are so many other types of policies out there.

Contact an independent agent or get insurance quotes online for an umbrella policy to ensure you’re getting the coverage you need at the price you want.

You might be surprised at how inexpensive a policy is for quite a lot of coverage. And that could help you sleep better at night.