What Is an Umbrella Policy — and Do You Need One?

Most people have heard of umbrella insurance but aren't sure exactly what it does. Here's the simple version: your home and auto policies each have liability limits. If a judgment against you exceeds those limits, your personal assets — savings, investments, home equity — are at risk. A personal umbrella policy sits above those underlying policies and picks up where they leave off.

How an Umbrella Works

Umbrella policies are typically sold in $1 million increments. You'll usually need minimum underlying limits on your home and auto policies to qualify — commonly $300,000 liability on homeowners and $250,000/$500,000 on auto. Once your underlying policy exhausts its limit on a covered claim, the umbrella responds for the remainder up to its limit.

The cost is remarkably low relative to the coverage provided. A $1 million umbrella typically runs $150 to $300 per year. Each additional million is often only $50 to $75. It's one of the best values in personal insurance.

What Does an Umbrella Cover?

• Auto accidents where you are at fault and medical costs exceed your auto policy limits
• Injuries to guests on your property that exceed your homeowners liability limit
• Dog bite liability beyond your homeowners limit
• Certain personal liability claims not covered by underlying policies (varies by carrier)
• Defense costs for covered claims

Who Needs an Umbrella Policy?

Umbrella insurance is often marketed to high-net-worth individuals, but the reality is that anyone with assets to protect and income that could be garnished should consider it. In Illinois, wage garnishment in civil judgments is permitted. If you own a home, have a retirement account, or earn a salary, a judgment exceeding your policy limits can affect all of it.

Factors that increase your umbrella need include: teenage drivers in the household, owning a pool or trampoline, owning dogs (especially certain breeds), frequent entertaining, owning rental property, or having a high public profile.

How Much Umbrella Coverage Is Enough?

A general starting point is to match your umbrella limit to your net worth. If your assets total $1.5 million, a $2 million umbrella makes sense. Many financial advisors recommend at least $1 million for most middle-class families, with $2 to $3 million for those with more significant assets or liability exposures. The additional cost per million is small enough that erring on the high side is rarely the wrong call.