Should You Have an Umbrella Policy as a Homeowner?

Have you heard of an umbrella policy? Unless you have a financial planner or someone in your life who has been sued, probably not. Umbrella insurance is one of those products that people buy AFTER something terrible happens to a friend, and never think about otherwise. That is unfortunate. An umbrella policy is one of the cheapest and most effective forms of personal financial protection you can buy, and most homeowners should at least seriously consider one.

What an Umbrella Policy Actually Is

A personal umbrella liability policy provides additional liability coverage that sits on top of the liability limits already built into your homeowners and auto insurance. The umbrella does not replace those policies. It extends them.

Here is the picture. Your homeowners insurance has a liability section, typically capped at $300,000 or $500,000. Your auto insurance has its own liability limits, typically $250,000 per person and $500,000 per accident. If someone slips on your icy driveway and sues you for $1.5 million, or if you are at fault in an accident that paralyzes another driver, the underlying policies pay out their full limits and then stop. Everything beyond that is on you, personally, including your wages, your savings, your retirement accounts, and any equity you have built in your home.

An umbrella policy picks up where the underlying policy stops. With a $1 million umbrella, in the example above, the umbrella pays the gap between what your homeowners policy covered and the $1 million ceiling. With a $2 million umbrella, you have $2 million on top of the underlying limits. The math is additive.