Umbrella insurance protects policyholders against liabilities that aren't covered by other insurance policies. While such liabilities may arise due to unforeseen issues that aren't typically covered by insurance, they also can exist simply because existing coverage does not provide enough protection. Determining how much umbrella coverage to purchase depends on several factors, including a potential policyholder's appetite for risk.
Because umbrella coverage picks up where other coverages leave off, determining how much umbrella coverage to buy depends in large part on existing deficiencies in coverage. For example, a driver with $1,000,000 in auto liability coverage may decide that no additional coverage is necessary in that area, while a driver with $500,000 in coverage may decide that a minimal $1,000,000 umbrella policy would help fill a gap. In some cases, umbrella insurance providers will require that existing coverage, such as auto liability insurance, exist at certain levels prior to the purchase of an umbrella policy.
Umbrella policies are intended to help pay for catastrophic liabilities. Thus one of the major factors in determining how much coverage is required is the net worth of the insured. Because umbrella insurance exists primarily to protect the wealth of the policyholder, those with a great deal of wealth may purchase policies worth several million dollars, in some cases up to $100,000,000. Meanwhile, those with few assets may decline umbrella coverage or purchase the typical minimum amount of $1,000,000. A lawsuit and bankruptcy may be devastating for an extremely wealthy family, while someone with little money in the bank has far less to lose.
To help determine how much umbrella coverage should be purchased, customers should first determine the areas of potential liability for which the coverage is important. A large family with a number of visitors may worry about people injuring themselves within the family's home, which may require a few million dollars of coverage. A terrible driver may be concerned about hitting the neighbor's expensive Ferrari, or creating medical liability far beyond her auto policy's coverage limits. An individual with great wealth but few potential areas of liability may decide that only minimal coverage is required.
Finally, those purchasing umbrella policies must determine how much risk they are willing to accept. Individuals with plenty of money for insurance premiums who find themselves worrying constantly about very remote liability concerns may feel more at ease if they purchase tens of millions of dollars of umbrella coverage to protect themselves against anything that could possibly go wrong. Others who don't worry as much and aren't concerned about a tiny risk of catastrophic liability may want to save money by buying minimal umbrella coverage of $1,000,000 or not buying an umbrella policy at all.
Wally Foster is a business attorney and entrepreneur who has been writing professionally since 2003. He has written for magazines including "Consumers Digest" and has contributed to several books published by Hundreds of Heads. Foster holds a Bachelor of Arts in English from Williams College and a law degree from Harvard.