All About Umbrella Insurance

Umbrella insurance is a type of additional liability coverage that works with different types of insurance policies. How umbrella insurance works is by providing policyholders with supplemental coverage that goes beyond the limits of their existing policies. You cannot use umbrella insurance in place of insurance, but you can add umbrella coverage to any policy for a few extra dollars a month. Enter your ZIP code below to start comparing umbrella insurance quotes for free.

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Melanie Musson is the fourth generation in her family to work in the insurance industry. She grew up with insurance talk as part of her everyday conversation and has studied to gain an in-depth knowledge of state-specific car insurance laws and dynamics as well as a broad understanding of how insurance fits into every person’s life, from budgets to coverage levels. She also specializes in automa...

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jul 21, 2021

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An umbrella insurance policy is a type of liability insurance that works across different types of policies. For example, a typical umbrella policy will cover you against liability claims related to your car and home insurance policies.

Umbrella policies do not replace having liability insurance for the home or car, but serve as an additional, large buffer if the liability costs go beyond the limits of their respective policies.

How Umbrella Policies Work

An umbrella policy is not purchased for a specific property. Instead, the policy is purchased for the person or family and serves, as the name implies, as shield against liability costs.

As an example, you might have a $50,000 limit on your car insurance, but medical and property damage costs can very quickly eat through that limit. Without the umbrella liability coverage, you could end up facing many thousands of dollars in out of pocket expenses.

Umbrella insurance is a supplemental policy that operates when those other policies have been exhausted, and it will not act as a substitute for having them.

Applying for Coverage

When you apply for an umbrella policy, you will need to provide a lot of information. The underwriter will need to know your insurance filing history, your credit score, and a complete list of all
property you own which could be used as a liability claim. If you own rental properties, those will need to be listed, and if you have a pool or other potential liability risks at home, those will
need to be listed as well. Umbrella policies have very broad applications and the insurance company needs to have a clear picture of what the risks they are insuring against might be.

Umbrella Policy Limits

Umbrella liability policies are typically written for values of $1,000,000 to around $5 million. Buying a policy that is too small could still leave you with personal costs, and buying too large a
policy means paying higher premiums for unnecessary coverage. Since your home and other property can be at stake if someone files a lawsuit against you in a liability claim, having an umbrella
policy capable of protecting your property is a vital concern.

Spreading Out the Coverage

The limits of an umbrella liability insurance policy are cumulative. That means that you can exhaust the liability limits of your car insurance, use $100,000 of the umbrella policy to settle the
outstanding medical and property damage claims, and still have coverage remaining to apply to home or auto liability in other cases. You will, however, be required to carry a specified limit of liability on your home and auto policies as well as any other underlying policies. Typically companies will require at least $250,000/500,000 on the auto and at least $300,000 on the home before they will consider writing the umbrella.

Umbrella Policies are Cost Effective

An umbrella policy is the least expensive way to get plenty of liability insurance. Because an umbrella policy is a secondary coverage, the underwriters can offer lower rates under the idea that
you may not file any claims against the policy, and that even if you do; the settlement will be buffered by the limits of the primary policy. Having a lot of liability coverage to pay for damages
and injuries is a good idea, and insurance companies offer these policies as a way to avoid financial disaster.

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