Should You Separate Your Auto and Umbrella Coverage? A CPA Explains

A move that looks cheaper can sometimes end up costing more.

According to U.S. News & World Report, the average cost of car insurance rises by $872 a year after an at-fault accident. That kind of increase is enough to push many drivers to compare policies and look for better rates.

Money Talks Newsletter subscriber Suresh V. is dealing with that situation and asked Money Talks News:

“I am looking for auto, home and umbrella insurances. My present insurance (all from Allstate) went up due to an accident. Another insurance company gave me a better rate on auto. But their umbrella insurance is way high.

Can I stay with the present insurance for home and umbrella and get auto insurance from a new insurance company? The present insurance company may increase home and umbrella insurance costs because of some discounts vanishing.

What problems might I have with two different insurance packages, especially with umbrella insurance?

What umbrella insurance does

Money Talks News founder and certified public accountant Stacy Johnson has the answer. First, it helps to understand what umbrella insurance is.

Umbrella insurance adds extra liability protection on top of policies such as auto and homeowners insurance.

If you are found liable for injuries or property damage and the claim exceeds the limits of your base policies, the umbrella policy may help cover the difference, including legal defense costs in many cases.

Why splitting coverage can be tricky

Many umbrella policies require the underlying auto and home insurance to be with the same insurer, or at least to meet certain liability limits that the umbrella provider can easily confirm. That can make it harder to spread coverage across multiple companies.

“A lot of umbrella policies require underlying auto coverage to meet minimum limits, and it’s hard for them to know that if it’s with another company,” Stacy says.

On top of that, Suresh could lose a bundling discount, which Stacy says can be as much as 25%.

So even if an insurer allows you to split your policies, the loss of discounts could raise the cost of your homeowners and umbrella coverage. You would still also need to meet the umbrella insurer’s liability requirements.

Stacy cautions that approval is not guaranteed when the policies are spread across several companies.

“The new umbrella insurance company may not even accept you at all. That’s what happened to me, actually. I tried to do that, but I had my motorcycle insurance elsewhere, and they wouldn’t let me do it,” he says. “You might as well just bundle everything and leave it where it is.”

For more on Stacy’s view, watch his video about umbrella insurance.

The bottom line: get quotes for both setups — keeping all three policies with one company and splitting them up. Then compare the total yearly cost and the coverage you would receive. Even so, bundling everything with one dependable insurer may still be the easier, safer and less expensive choice.