The problem it solves
If you injure someone, whether with your car or through a guest's fall down your stairs, you are personally liable for the damages, and a serious injury easily runs past the limits of an ordinary policy. State minimum auto liability limits are often as low as $25,000 per person, which one night in a trauma unit can exceed. When a judgment is larger than your coverage, the rest comes from you: savings, home equity and, in most states, a share of your future wages through garnishment. A person with little in the bank and a good salary ahead is not judgment-proof.
How it works
An umbrella sits above your auto and homeowner's or renter's policies and pays after their liability limits are used up. It is sold in million-dollar layers, and the first million commonly costs somewhere around $200 to $500 a year, with each further million costing less. The insurer will require fairly high underlying limits first, typically $250,000 per person and $500,000 per accident on the auto policy and $300,000 on the home policy, so raising those may add to the real cost. The policy also pays for your legal defense, which matters even in suits you win, and it usually covers some claims the underlying policies do not, such as libel and slander.
What it leaves out
An umbrella covers your liability to other people. It does not pay for your own injuries or your own property. It excludes intentional or criminal acts, professional mistakes, and liability from a business you run, so a side business or a rental unit may need its own coverage.
Who should buy
The usual advice is to carry liability coverage at least equal to your net worth, and more if your income is high. Certain facts raise the odds of a claim regardless of wealth.
- You drive a great deal, or you have a teenage driver in the house.
- You own a dog, a pool, a trampoline or a boat.
- You host often, employ household help or coach youth sports.
- You post public opinions about people and businesses.
Start with the company that insures your car, since most insurers require that they hold your auto policy and they discount the bundle. List every driver and every vehicle honestly, because an undisclosed one is a standard reason for a denied claim.
Note If an umbrella is premature, raise your auto liability limits from the state minimum to $100,000 per person and $300,000 per accident. It is among the cheapest large improvements in personal insurance.
