The Cost of Umbrella Insurance for Homeowners

Homeowners insurance offers liability protection, but only up to policy limits. Ditto for auto insurance. Umbrella insurance provides additional liability coverage beyond those policy limits. That added protection could mean the difference between preserving and losing all of your assets, including your home, as a result of a lawsuit.

A $1 million umbrella policy can typically be purchased for about $300, though numerous factors affect annual premiums. Surprisingly, your driving record can influence the cost of umbrella insurance as much, if not more, than your record as a homeowner.

Umbrella insurance premiums, deductibles

Consider $300 per year a ballpark figure to get you started in your exploration of umbrella insurance. Individual circumstances could push up premiums considerably--or even lower them. Dan Weedin, a Seattle-based insurance and risk management consultant, says you may be able to pay less, perhaps as little as $150, if you have just one car, a good driving record, and a solid credit history. In many cases, umbrella policies can be issued in a couple of hours.

Umbrella insurance usually has high liability deductibles; $300,000 for homeowners insurance and $250,000 for auto insurance are typical. Coverage only kicks in once your other liability protection is exhausted. Most issuers of umbrella insurance won't issue a policy unless your existing home and auto insurance meet required liability limits.

To make sure the umbrella deductible dovetails with existing home and auto insurance, buy all three policies from the same insurer. Not only can that make coordinating claims easier, but many insurers offer multi-policy discounts. Travelers, for one, may lower umbrella premiums by up to 20% if you also insure your home or auto with the company. That's a potential average savings of $60 a year.

The driving-homeownership connection

Homeowners with especially poor driving records may have to go into a special high-risk insurance pool, meaning they'll pay much more for their umbrella policies, says Bob Gustafson, a certified financial planner in Marlborough, Mass. If there's a teenage driver at home, expect your umbrella policy to cost more. Teen drivers are more accident-prone, thus increasing the risk of a high-payout lawsuit.

If it seems as if driving has more of an effect on umbrella costs than the house itself, to a large extent that's true. There are far more accidents on the road than there are at home. And any accident, regardless of whether it occurred on your property or in your vehicle, could result in a lawsuit that threatens your home.

Ironically, at least in the minds of many homeowners, the cost, size, and age of a home have little effect on liability. More relevant are specific features of a home, like a swimming pool, that are more likely to lead to accidents. All other things being equal, says Mario Morales at MetLife Auto and Home, a $1 million umbrella policy costs the same for the owner of a newly built 10-bedroom mansion as it does for the owner of a tiny, decades-old bungalow.

Calculating umbrella coverage

That doesn't mean the owners of the mansion and the bungalow need the same amount of liability coverage. Why? Because the mansion owner probably has more to lose from a lawsuit. Gustafson, the financial planner, says homeowners should think about liability coverage equal to twice net worth (and no less than $1 million). Doubling net worth accounts for your future income stream too, since that can be fair game in a suit.

Premiums will start to add up, though, especially if you seek umbrella coverage above $5 million, says Richard A. McGrath of McGrath Insurance Group in Sturbridge, Mass. Be realistic about your assets and risks. MetLife's Morales says, for example, that a new homeowner with little equity built up may require less coverage. Weedin, the Seattle insurance consultant, offers this list of factors to consider when deciding how much liability coverage to buy:

• Net worth. The higher it is, the more coverage you need.
• Owning a business. Your potential exposure to lawsuits increases.
• Young drivers in the household. Teens are more accident-prone.
• Visibility in your community. The better known you are--think CEO or celebrity--the more potential there is for a lawsuit because you're considered a person with "deep pockets."
• Attractive nuisances. Kids are more likely to get hurt at homes with pools, trampolines, jungle gyms, and the like.

Other steps to take

If you have special circumstances--maybe you run a business out of your home or employ domestic staff--speak to your insurance agent about what's covered by standard umbrella/homeowner policies. You may need to buy appropriate riders. Home-business and domestic-employee riders can run about $300 to $400 a year.

There are steps you can take to protect your assets from lawsuits beyond umbrella insurance, says Hunter William Bailey, a financial adviser in Citrus Heights, Calif. Homeowners could look into putting as much of their net worth as possible into qualified retirement plans, since those plans are often off the table in lawsuits. Exploring trusts and limited-liability corporations, or LLCs, is also a good idea.

Another strategy, says Bailey, is taking out, but not tapping, a large line of credit, and having the lender record the largest amount of potential loan on your property. This has the effect of showing little or no equity on a house, which may discourage attorneys looking for a big payday.

Some states have so-called homestead laws that might protect your home from creditors in certain situations. The laws vary by where you live, and there are many exceptions, so consult a knowledgeable attorney.