When Do You Need Umbrella Insurance?

When you own property—be it a home, a car, or a boat—having adequate damage and liability insurance is essential. But if you're responsible for damage or injury to someone else's property or person, your coverage may fall woefully short.

Enter umbrella insurance, which provides liability coverage beyond most property insurance policies. This includes coverage for damages caused by you and members of your household, as well as limited coverage in the event you're sued.

"Umbrella insurance is a way to protect you in a worst-case scenario," says Austin Jarvis, director of trust, tax, and estate at the Schwab Center for Financial Research. Consider an insurance policy for a boat with liability coverage of $100,000. If a wrongful-death lawsuit leads to $1 million in damages, the other $900,000 would come from the policyholder's own pocket—unless they have a $1 million umbrella policy, which would cover the gap between the boat policy and the total damages due.

Although umbrella insurance is of particular value to affluent individuals with significant assets to protect, nearly anyone can benefit from the extra coverage. In general, Austin says those making $250,000 or more a year should consider at least a minimal umbrella policy, especially as premiums on such policies are relatively low.

"The best thing about umbrella insurance is that it's on the cheaper side because you generally have to exhaust your other policies before it kicks in," Austin explains, "whereas selecting higher liability coverage on individual policies can quickly become cost-prohibitive."

When purchasing any new insurance, an experienced broker can help ensure your policies work together while avoiding unnecessary coverage. "As a rule of thumb, your total coverage should never exceed your net worth," Austin says, "because under no circumstances do you need to protect more than you own."