Hanna Renaldi's Blog: How Umbrella Coverage Can Supercharge Your Car Insurance Policy

Choosing the right amount of liability insurance is one of the most important decisions you make when buying a car insurance policy. Liability coverage pays to repair the damage you cause others, including injuries and property damage. You can typically buy up to $300,000 or $500,000 of bodily injury liability insurance in a standard auto policy.

Half a million dollars might sound like a lot of money, but it’s possible it wouldn’t cover the costs of a severe accident with multiple injuries. If you own a home and have substantial savings, you might need to protect them with an umbrella policy.

What umbrella insurance covers

An umbrella policy pays out after you’ve reached the liability limits on your car and homeowners insurance policies.

If you cause a wreck, and the medical bills and cost to repair the property damage exceed the liability limits on your car insurance policy, accident victims can sue you and recover the difference from your assets. Without an umbrella policy, you could lose your home or savings.

[Compare car insurance quotes through NerdWallet’s Car Insurance Comparison Tool.]

Your homeowners liability coverage pays out if someone gets injured on your property, and you’re held legally responsible. For instance, it would pay the medical bills for a visitor who slips and falls on a broken porch step. It also covers damage you, your family members or pets cause to other people. If your child accidentally hits a baseball through the neighbor’s window, your homeowners insurance liability would cover the repair costs.

When you need umbrella insurance

You might need umbrella liability insurance if you own property or have quite a bit of money in the bank. To decide, determine your net worth. Include the value of your home, stocks, bonds and savings. Employer-sponsored retirement plans, such as 401(k)s, are generally safe from lawsuits, but IRAs may not be.

If your net worth exceeds the amount of liability insurance you can buy on your home or on your car insurance policy, then an umbrella policy is a good idea.

How to buy umbrella insurance

You’ll need to have at least $250,000 worth of liability coverage through your car insurance and $300,000 through your homeowners insurance before most insurers will sell you an umbrella policy, according to the Insurance Information Institute.

Umbrella liability policies are sold in increments of $1 million, and they’re relatively inexpensive for the amount of coverage. The institute says the first $1 million will cost about $150 to $300 per year. The next $1 million will cost about $75 per year, and every million after that will cost around $50 each.

Umbrella policies aren’t sold online. To get a quote, you’ll need to call your insurance agent or insurer directly.

If you think you need an umbrella policy, first make sure that you have the maximum amount of liability coverage on your homeowners and auto policies. NerdWallet’s car insurance comparison tool can help you get quotes.

Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.

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