# What Is an Umbrella Insurance Policy? Definition and Who Needs It

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## What Is an Umbrella Insurance Policy?

Umbrella insurance policies add a crucial layer of liability protection beyond typical homeowners, auto, or watercraft policies, safeguarding individuals at risk of lawsuits from extensive financial responsibilities. These policies are vital for anyone who may face claims exceeding their coverage limits due to accidents, resulting property damage, or personal injuries. In addition, umbrella policies cover claims like libel, slander, vandalism, and invasion of privacy, ensuring comprehensive protection.

### Key Takeaways

*   An umbrella insurance policy provides extra liability coverage that surpasses the limits of standard homeowners, auto, or watercraft insurance, offering protection against potential lawsuits for property damage or injuries to others.
*   This type of insurance is particularly beneficial for high-net-worth individuals or those with significant assets at risk, as it acts as a financial safety net when base insurance coverage is exhausted.
*   Umbrella insurance can also cover liabilities like libel, slander, and invasion of privacy, which are not typically included in standard insurance policies.
*   People with high-risk properties, such as swimming pools or trampolines, or those engaged in activities that may increase the likelihood of a lawsuit, might find additional protection provided by umbrella insurance valuable.
*   The annual premium for a $1 million umbrella insurance policy typically ranges from $200 to $300, offering significant additional coverage at a relatively low cost.

## Understanding the Mechanics of Umbrella Insurance

Umbrella insurance is most beneficial for wealthy individuals with valuable assets who are at a higher risk of lawsuits. Small businesses may also use an umbrella insurance policy to guard against potential monetary damages arising from claims.

The premium for an umbrella insurance policy may be less expensive if it is purchased from the same insurer that provided the original auto, homeowners, or [watercraft insurance](https://www.investopedia.com/terms/w/watercraft-insurance.asp). To add umbrella insurance, a policyholder usually needs $150,000 to $250,000 in [auto insurance](https://www.investopedia.com/terms/a/auto-insurance.asp) coverage and $250,000 to $300,000 in [homeowners insurance](https://www.investopedia.com/terms/h/homeowners-insurance.asp), depending on the provider.

Umbrella insurance is often referred to as excess [liability insurance](https://www.investopedia.com/terms/l/liability_insurance.asp). If a policyholder is sued for damages that exceed the liability limits of car insurance, homeowners insurance, or other coverage types, an umbrella policy helps pay what they owe. In other words, if the dollar limit of the original policy has been exhausted, the umbrella policy acts as a fail-safe, so the insured person doesn't have to dip into savings and other assets.

> **Important**
>
> Umbrella insurance can also cover things not typically included in standard insurance, like libel, slander, and false imprisonment.

## Who Should Consider Umbrella Insurance?

People with valuable assets or dangerous items like pools or dogs might buy umbrella insurance for extra protection.

If you have a mortgage loan, homeowners insurance is required by mortgage lenders. However, if you have high-risk items on your property, an umbrella policy can provide additional liability coverage that exceeds the homeowners policy.

Those involved in activities with higher lawsuit risks might also consider umbrella insurance. Those activities might include:

*   Being a landlord
*   Coaching kids’ sports
*   Serving on the board of a nonprofit
*   Volunteering
*   Regularly posting reviews of products and businesses
*   Participating in sports where you could easily injure others, such as skiing, surfing, or hunting

### Cost Considerations of Umbrella Insurance

The annual cost of a $1 million personal umbrella insurance policy

## Real-Life Scenario: How Umbrella Insurance Can Help

To understand how umbrella insurance can help, consider the following scenario: A driver runs a red light and accidentally hits another car, causing significant damage to the vehicle and injuring several people. If car repairs cost $50,000 and injuries exceed $500,000, the at-fault driver could face costs beyond their insurance limits. [An umbrella insurance policy](https://www.investopedia.com/articles/personal-finance/040115/how-umbrella-insurance-works.asp) will pick up the additional liability costs beyond the limits of their car insurance coverage.

## Why Would Someone Need an Umbrella Insurance Policy?

An umbrella policy is helpful if someone is injured on your property or you injure someone while using one of your possessions, such as your car, boat, or automobile. If you're sued and found liable, the umbrella policy can cover the financial compensation to the injured party, protecting your assets.

## What Is Not Covered by an Umbrella Policy?

An umbrella policy provides liability protection, which helps cover the cost of damage to another person's property or if they're injured, but it does not cover your possessions, such as your home or automobile.

## Do Retirees Need an Umbrella Insurance Policy?

If you have built up a substantial amount of assets and are at risk of being sued due to high-risk items or activities, such as having a swimming pool or boat or being a landlord, you might consider an umbrella policy to provide additional liability protection.

## The Bottom Line

An umbrella insurance policy provides additional personal liability coverage for those with an existing policy. Umbrella coverage starts after the liability limits of the original policy are reached. Those who own dangerous items that can cause injury, such as swimming pools, trampolines, or dogs, might buy umbrella insurance. Those engaged with others, such as landlords, coaches, and board members, might also buy umbrella insurance.  

> **Article Sources**
>
> 1.  Commonwealth of Massachusetts. "[Personal Umbrella and Excess Liability Insurance](https://www.mass.gov/info-details/personal-umbrella-and-excess-liability-insurance)."
>     
> 2.  Insurance.com. "[How Much Umbrella Insurance Do I Need?](https://www.insurance.com/auto-insurance/coverage/umbrella-insurance-policy-guide.html)"