What Are the Downsides of Umbrella Insurance?

Executive Summary: The main downsides of umbrella insurance are that you must carry minimum liability limits on your home and auto policies before you can buy one, the policy has a coverage cap and exclusions (including most business activity), and it covers only what you owe others, not your own injuries or property. For most households with assets to protect, these tradeoffs are manageable, but you should know them before you rely on the coverage.

Umbrella insurance is one of the most cost-effective ways to protect your savings from a lawsuit. It is not a perfect product, though. The downsides of umbrella insurance are real, and understanding them keeps you from assuming you're covered when you aren't.

What Are the Main Downsides of Umbrella Insurance?

There are three main downsides of umbrella insurance: you need minimum coverage on your other policies first, the policy has limits and exclusions, and it only pays for liability, not your own losses.

Do You Need Certain Coverage Before You Can Buy an Umbrella Policy?

Yes. Insurers require you to carry a minimum level of liability coverage on your home and auto policies before they will sell you an umbrella policy. These minimums vary by insurer, but they are often higher than the basic limits many people carry.

If your current limits fall short, you will need to raise them first, which increases the premiums on your homeowners and auto policies. Your umbrella policy also sits on top of those underlying policies. If you let the underlying coverage lapse or drop below the required limit, you may be personally responsible for the gap before the umbrella pays anything.

What Are the Coverage Limits of Umbrella Insurance?

An umbrella policy pays only up to the limit you buy, and it does not cover every kind of claim. If you expect one policy to cover your personal life and your business, you will be disappointed.

Here is where the limits show up:

• Dollar cap: A $1 million umbrella policy will not fully protect you from a $3 million judgment. You pay anything above your limit out of pocket.
• Business activity: A personal umbrella policy generally excludes business and professional liability. If you own a business, work as a consultant, or rent out property, you will likely need separate coverage, such as general liability, professional liability, or a commercial umbrella.
• Exclusions: Umbrella policies commonly exclude intentional acts and certain contractual liabilities. Read the exclusions section of your policy, not just the sales summary.

Because policies differ, ask your agent exactly which activities and exposures your umbrella covers.

Does Umbrella Insurance Cover Your Own Injuries or Property Damage?

No. Umbrella insurance is liability coverage. It pays for injuries and property damage you cause to other people, plus related legal costs, but it does not pay for your own injuries or your own property damage.

Your other policies already handle those losses, which is one reason the umbrella policy does not. Your health insurance, the medical payments and collision coverage on your auto policy, and your homeowners policy cover your own injuries and damage. Think of an umbrella policy as protection for your savings and future income against a lawsuit, not as a replacement for any of your other insurance.

Is Umbrella Insurance Still Worth It Despite the Downsides?

For many households with savings, a home, or strong earning power to protect, yes. The downsides of umbrella insurance are limits on what the policy covers, not reasons to skip it. An umbrella policy typically adds $1 million or more of liability protection for a modest annual premium, which is hard to match with any other tool.

The key is to buy it with clear expectations:

• Confirm your home and auto liability limits meet the insurer's minimums.
• Choose an umbrella limit that reflects your net worth and future earnings.
• Pair it with business liability coverage if you own a business or have professional exposure.
• Keep your health, auto, and homeowners coverage in place for your own losses.

As a fee-only fiduciary firm, Oak Road Wealth Management does not sell or earn commissions from insurance products, so our guidance on how much coverage you need is not tied to a sale. If you would like help reviewing your liability coverage as part of your broader financial plan, contact our team. We work with clients in Lee's Summit, Missouri, and across the country.

Frequently Asked Questions About Umbrella Insurance

What are the downsides of umbrella insurance?

The downsides of umbrella insurance are required minimum coverage on your home and auto policies, a coverage cap with exclusions (including most business activity), and liability-only protection that does not pay for your own injuries or property damage.

Do I need certain coverage before I can buy an umbrella policy?

Yes. Insurers require minimum liability limits on your home and auto policies before they will issue an umbrella policy. The exact minimums vary by insurer, so ask your agent what yours requires.

Does umbrella insurance cover my business?

Usually not. A personal umbrella policy generally excludes business and professional liability. Business owners typically need general liability, professional liability, or a commercial umbrella policy.

Does umbrella insurance cover my own injuries or damage?

No. Umbrella insurance pays for injuries and damage you cause to others, along with related legal costs. Your health, auto, and homeowners policies cover your own injuries and property.

What happens if a judgment is larger than my umbrella limit?

You are personally responsible for the amount above your limit. This is why it is important to choose a limit that fits your net worth and future earnings.

Is umbrella insurance worth the cost?

For many households, yes. Umbrella policies often cost a few hundred dollars a year for the first $1 million of coverage, which is a small price for protection against a lawsuit that could threaten your savings and income.

‍

This article is for general education only and is not insurance, legal, or tax advice. Coverage terms vary by insurer and state, so review your specific policies with a licensed insurance professional.

Written by Andrew Matz, Financial Planner at Oak Road Wealth Management.