Umbrella insurance

Also called personal umbrella policy, excess liability insurance

Extra liability coverage that pays after home and auto liability limits are used up, typically sold in million-dollar amounts.

What it means

An umbrella policy adds a layer of liability protection on top of homeowners, renters and auto policies. If a person is sued or found responsible for an injury or damage that exceeds the limits of those underlying policies, the umbrella pays the excess up to its own limit. It may also cover some claims the underlying policies do not, such as certain defamation suits, and often pays legal defense costs.

Insurers usually require the underlying policies to carry minimum liability limits before selling an umbrella. It does not cover the policyholder’s own property or injuries, business activities, or intentional acts. Coverage is commonly sold in increments of $1 million.

Example

Suppose a driver with $300,000 of auto liability coverage and a $1 million umbrella causes an accident resulting in an $800,000 judgment. The auto policy pays $300,000 and the umbrella pays the remaining $500,000.

How it’s used

Households with significant assets or future earnings to protect
Owners of pools, trampolines or dogs
Landlords and frequent hosts

Strengths and weaknesses

Strengths

Large amount of coverage for a relatively modest premium
Covers liability across home and auto
Often includes legal defense costs

Weaknesses

Requires raising underlying liability limits, which can add cost
Does not cover one’s own property or business activities
Exclusions vary by insurer

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.