UPDATED: Mar 13, 2020
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Umbrella insurance policies provide extra coverage beyond the limits of your existing policy. If you already have car insurance, however, then do you really need an umbrella policy?
Today, we’re helping you decide if you should get an umbrella policy if you already have car insurance.
An Umbrella Policy Raises your Car Insurance Limits
All states in America (except New Hampshire) require you to have basic liability car insurance to legally drive on the road. In many states, however, the liability coverage limits are surprisingly low. The limits are so low that your car insurance will not cover many types of accidents.
If you get into an accident with a van full of people, for example, then you might have $1 million worth of medical bills to pay. If you were liable for the accident, then you’re on the hook for any expenses – including property damage to the vehicle, medical expenses incurred by the passengers and driver, and any other expenses incurred in the accident.
If that accident occurred in California, where drivers are required to have only $30,000 of bodily injury liability coverage per accident, then you would be on the hook for the remaining $970,000 out of pocket. Your car insurance will happily cover damage up to the limit of your policy. Beyond that limit, however, your car insurance is exhausted, and you are required to pay the rest out of pocket.
That’s why some drivers buy umbrella insurance policies.
How an Umbrella Insurance Policy Works with Car Insurance
Umbrella insurance policies are designed to comprehensively protect you from multiple types of liability. If you get sued or are liable for someone’s injuries, then you might be required to pay a significant amount of compensation out of pocket.
Your ordinary insurance policy only protects you to the limits of your policy. An umbrella insurance policy, meanwhile, adds significantly more coverage to your plan.
For the purposes of car insurance and umbrella insurance, there are two types of policies that matter most:
By law, you are required to carry coverage for both of these liabilities on your car insurance plan in most states. Unfortunately, most states have surprisingly low liability limits – which is why many drivers choose to add an umbrella policy.
California, for example, has a bodily injury liability limit of $30,000 and a property damage liability limit of $5,000. If you maintain the lowest minimum level of car insurance in California, then you have minimum coverage in the event of an accident. Your car insurance will only cover $5,000 in damage to the other person’s vehicle, for example, and $30,000 of medical bills (maximum of $15,000 per person). Beyond that, you’re out of luck and need to pay out of pocket.
If you want to get added protection, then consider getting an umbrella policy. Available through most insurance companies, umbrella policies typically add at least $1 million in coverage to your insurance policy – and they go up from there.
Most major insurance companies in the United States add up to $5 million in coverage through umbrella insurance.
Approximately 1 in 10 accidents on U.S. roads cause damages and medical expenses greater than $1 million. If you have basic liability car insurance, then you do not have enough insurance coverage to protect yourself in a collision like this. In this case, an umbrella policy might be the right choice for you.
Should I Get Umbrella Insurance?
For some drivers, umbrella insurance is an unnecessary expense. For many drivers, however, umbrella insurance is a no-brainer decision that can literally change your life. It can be the difference between declaring bankruptcy and living debt-free for the rest of your life.
Here are some types of people who can benefit from umbrella insurance:
Drivers with Significant Assets: The higher your net worth is, the more you can lose in a lawsuit. If you get into an asset with someone with few assets, then you have limited incentive to sue, because even if you win you’re not going to get a lot. If you get into an accident with someone with substantial assets, however, you have greater incentive to sue.
Drivers with Bright Futures: You may not have substantial assets today. However, if you anticipate having substantial assets in the future, then you might consider getting an umbrella policy today. A lawsuit could target future earnings. If you’re in school to be a doctor, for example, your net worth might be low today but you expect to earn a large salary in the future. An umbrella policy can protect those future earnings.
Commuters and Carpoolers: If you drive to work every day, or if you frequently drive a car full of people around, then it may be in your best interest to buy umbrella insurance. The more time you spend on the road, the more chances you have to be involved in an accident. And, when you have more people in your vehicle, damages and medical expenses can quickly add up and exceed your policy limits.
Rideshare Drivers: Many insurance companies recommend rideshare drivers buy umbrella insurance. If you drive for Uber or Lyft, then you might be left with significant gaps while driving. Uber and Lyft drivers automatically receive some insurance when driving to pick up a passenger or drop off a passenger. However, these limits are relatively low – especially if you have a larger vehicle that accommodates multiple passengers. An umbrella policy can protect you from liability.
Owners of Certain Dogs: If you’re the owner of an aggressive dog, then that dog can turn into a liability nightmare with a single simple mistake. A dog bite lawsuit can cost hundreds of thousands of dollars. Sometimes, your homeowner’s insurance will cover dog bite injury lawsuits. However, some homeowner’s insurance policies exclude certain breeds – like pit bulls or rottweilers. In this case, an umbrella policy might be your best option.
How Much Does an Umbrella Policy Cost?
An umbrella policy adds a significant amount of liability coverage to your car insurance policy without breaking the bank. Typically, a $1 million umbrella insurance policy will add $150 to $300 to your annual insurance premium.
If you want to add extra protection, then most insurance companies offer umbrella policies that add up to $5 million in coverage.
Most major car insurance companies in the United States offer umbrella insurance policies. In exchange for slightly higher premiums, you get significantly higher coverage limits for property damage liability, bodily injury liability, and other liability coverages. If you’re willing to pay slightly higher premiums for significantly better peace of mind, then umbrella insurance might be the right choice for you.