Pros and cons of umbrella insurance

There are both pros and cons to buying an umbrella insurance policy, although for most people the benefits outweigh the disadvantages. Umbrella insurance covers much more than either your auto or home insurance, but there are some caveats.

Pros

Umbrella insurance provides a lot of coverage, starting at $1 million, for a low cost.
An umbrella policy helps to protect your assets, including your home, if you’re found to be liable or negligent for injuries or damage.
Umbrella insurance starts where your home or auto coverage leaves off, meaning it’s an additional limit on top of that limit, creating a much larger pool of resources in a lawsuit or claim.
Umbrella insurance covers things home and auto don’t, like libel or slander, malicious prosecution and false arrest.

Cons

Umbrella insurance doesn’t cover everything; it doesn’t cover personal property, your injuries, written or oral contracts, war or terrorism or business losses, for example.
Generally, you can’t buy umbrella insurance unless you buy the highest available amount of home and auto liability protection, which means your home and auto insurance rates will be higher.
You may have to buy umbrella insurance through the same insurer as your home and auto; if your current company doesn’t offer it, that might mean switching.

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What are the disadvantages of umbrella insurance?

An umbrella insurance policy does come at an additional cost and requires that you carry high underlying liability coverage limits. It doesn't cover every possible situation. However, for people with a high level of risk, these points may be caveats more than actual disadvantages and are unlikely to outweigh the benefits of umbrella insurance.

Do you need an umbrella insurance policy?

Anyone with a high net worth should buy umbrella insurance, but if you’re not sure, it’s best to consult with a financial advisor. Liability claims can easily exceed auto and home policy limits, and those with a lower net worth may be less able to handle additional court costs or judgments.

However, there are costs involved in buying more coverage, so take the time to be sure it’s right for you. "Like most insurance, it's best to shop around for the lowest premiumThe payment required for an insurance policy to remain in force. Auto insurance premiums are quoted for either 6-month or annual policy periods.," Cozza says.

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Expert answers to your questions

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Leslie Kasperowicz Executive editor.

Is it cheaper to buy a personal umbrella policy than to increase my auto and home insurance liability limits?

It might be cheaper, but it also might not give you the coverage you need. First, it's important to note that many umbrella insurance companies will require that you increase your underlying auto and home limits to the maximum available before you can buy umbrella insurance. So you may have to pay more either way. Second, umbrella insurance offers much higher limits that are available on home and auto insurance. To get the amount of coverage you need, umbrella insurance may be the only option. Finally, home and auto insurance limits can't be combined; if a claim against your home insurance exceeds your limits, you can't use your auto insurance liability coverage to cover the excess; only umbrella insurance can do that. So, while it may be cheaper to simply increase your auto and home insurance limits, it doesn't provide the same level of coverage.

How can umbrella insurance help protect me?

Umbrella insurance provides a much higher level of liability protection than either home or auto insurance against lawsuits. It will protect your assets in the event of a major claim against you and protect you from more situations than any other policy.

At what level of net worth does buying umbrella insurance make sense?

In general, you should consider umbrella insurance if your net worth exceeds the underlying limits on your home and auto policies. It's also important to consider not just current net worth but future income, which can be impacted by a judgment against you. If you're not sure, speak with a financial advisor.

Is it a good idea for the average person to buy umbrella insurance?

It's never a bad idea to have umbrella insurance, but it is an added cost so it's worth exploring your needs. Whether or not you need umbrella insurance depends on a lot of personal factors. There's really no average person when it comes to buying umbrella insurance. Your assets, risk level and tolerance for risk all come into play, so it's important to sit down with a financial advisor to examine your situation and decide if umbrella insurance is right for you.

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Pros and cons of umbrella policy: Frequently asked questions

Is umbrella insurance worth it?

As with all insurance policies, an umbrella insurance policy is worthwhile when you need it. For those with an elevated risk of a liability claim, umbrella insurance cost is worthwhile for peace of mind alone.

When should you buy umbrella insurance?

You should purchase umbrella insurance coverage when your assets outgrow your underlying policy limits. Look at your homeowners insurance and auto insurance liability coverage, and determine whether they are enough to protect your assets.

Who needs umbrella insurance?

Anyone who has assets that would not be adequately protected by either their auto or homeowners insurance limit, even when increased to the highest possible levels, needs umbrella insurance.

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