How Much Umbrella Insurance Do I Need?

Are you wondering, How much umbrella insurance do I need? No? Well, here’s a fun story:

You just finished renovating your home for larger gatherings because hospitality is a core value of yours—so of course you throw a party! You invite all the neighbors . . . including the guy who cuts his lawn with scissors and a level. We’ll call him Brian.

As everyone starts arriving, you tell folks to be careful on the new deck because it rained. Brian makes a beeline for your backyard to inspect your lawn and slips on the wooden steps. It’s bad. He breaks a hip. Your party’s ruined, but worse still, Brian sues you for negligence and wins . . . $700,000!

That’s everything you’ve got: your whole nest egg, emergency fund, college fund and the change in the sofa.

Okay, we lied—this story wasn’t fun. It’s pretty awful. But now are you thinking, How much umbrella insurance do I need?

If you have a net worth of $500,000 or more, umbrella insurance is absolutely necessary. We’ll show you exactly how to figure out what you need so your nest egg is protected.

What Is Umbrella Insurance? 

First, what is an umbrella policy? (If you came here wondering how much excess liability you need, we have good news. It’s the same thing.) Umbrella insurance is a type of personal liability coverage that protects you (plus your family and other household members) from large claims or lawsuits that go above your homeowners, auto, and even boat insurance policies’ liability limits.

Umbrella insurance covers your money by filling the financial gap that your primary liability insurance doesn’t cover. Meaning if you’re sued and your auto insurance only covers $100,000, you’ll have protection for anything above that.

How Much Umbrella Insurance Do You Need? 

Now, how much umbrella insurance do you actually need? How much is enough to cover your money and lifestyle?

Here’s the math. (And don’t worry, it’s not calculus.) The amount of your umbrella insurance policy should match your entire net worth. So if your assets stand at $1 million—bingo. That’s how much umbrella insurance you need. $3 million? Same. Basically, the more money you have, the more you have to lose.

However, certain assets, like employer-sponsored retirement accounts, aren’t at risk from most lawsuits due to federal regulations. So you can usually leave those out of your calculations. But it’s still a good idea to ask your insurance agent to check your math.

What Does Umbrella Insurance Cover? 

Umbrella insurance covers these five main areas.

Bodily injury: A neighbor kid breaks their arm on your trampoline? You’re covered! Umbrella insurance protects you from things like medical bills or lawsuits involving bodily injury. It also covers things like dog bites and car accidents. (If your dog bites someone during a car accident? You’ll have to check your policy on that one . . .)

Legal fees: Umbrella insurance also kicks in if someone sues you—whether it’s justified or not. So you won’t have to worry about paying those hefty lawyer fees out of pocket.

Injury to people’s reputation: If you’re sued for slander, libel or defamation—basically anything damaging someone’s reputation—umbrella insurance will cover these expenses.  

Property damages: As we saw, umbrella insurance also has your back after car accidents, including the cost to repair people’s property.

Rental property: An umbrella policy also protects you as a landlord if you’re sued after an accident on your rental property.

 
Umbrella insurance policies begin at $1 million and go up from there in $1 million increments. This might seem like a lot, but when it comes to lawsuits and insurance claims, things can add up fast.

And if at least two of these apply to you, you might need more than the $1 million minimum coverage:

• You own property
• You have recreational vehicles (Jet Skis, dirt bikes, etc.)
• You have an inexperienced driver in your household
• You coach youth sports
• You regularly invite people over to your home
• You have "attractive nuisances" to a curious child (trampoline, pool, etc.)
• You drive a luxury car
• You serve on a board or nonprofit
• You regularly post reviews of products and businesses
• You participate in sports where you could injure others (hunting, skiing, etc.)
• You frequently travel outside the U.S. and worry about liability claims
• You’re a landlord
• You have a public profile of success and wealth

You should also ask yourself, What are the chances I’ll be sued for something? So many today are ready to sue for even the smallest reason. But with a healthy umbrella insurance policy in place, you won’t be up late staring at the ceiling, wondering who you offended online. Instead, you’ll have peace of mind knowing you’re covered.
 

Buying an Umbrella Insurance Policy

When you go to buy umbrella insurance, most carriers won’t let you get a stand-alone policy. You’ll need to add umbrella insurance to an existing policy.

And before you can add umbrella insurance to your existing policy, you’ll need a certain amount of liability in your other policies. Most insurance companies require you to have $250,000 in auto insurance liability and $300,000 for your homeowners insurance.¹ For some of you, this might mean paying more on your auto or home insurance premiums to get umbrella insurance.

Sometimes insurers will let you bump your home or auto liability limit up pretty high—up to $1 million in some cases. But it’s usually a better deal to buy the minimum required to qualify for umbrella insurance and then buy the umbrella.

And here’s the deal: If you buy your umbrella policy from the same provider you have your home or auto policy through, you’ll probably get a discount. Woo! FYI, this is called bundling. An independent insurance agent can help you figure out if bundling is your best bet.

Another bonus to bundling? If you’re sued, you only have to work with one insurance company instead of two because both your policies are under the same roof. Who needs more stress during a lawsuit? Yeah, nobody. Also, if the requirements around your umbrella policy ever change, making the necessary adjustments will be easier if everything is under one carrier.

Now, there are a few reasons you might not be able to purchase an umbrella policy with your current car or homeowners insurance carrier. It could be that you’ve had one too many incidents or you own a pit bull or other uninsurable dog. If you end up in this spot, talk to an independent insurance agent. They can help you find a stand-alone umbrella policy that fits your needs.

Is Umbrella Insurance Worth It? 

Without a doubt, umbrella insurance is one of the best buys in the insurance industry. It’s affordable and gives you rock-solid protection. But let’s still take a quick look at the pros and cons so you can make an informed decision.

Even looking at the cons list, we think it’s pretty obvious umbrella insurance is a must-have for anyone with a net worth over $500,000. You’ve spent years working to build wealth—don’t let an unfortunate mistake or greedy person destroy it all.

Now that you know you need a one-to-one ratio of umbrella insurance to net worth (aka if you’re worth $2 million you need a policy worth at least $2 million), you can start looking around for a policy.

We recommend shopping around to make sure you find the best deal. Make sure you check with your current insurance carrier to see if bundling your umbrella with your home or auto insurance will save you money.

If you want help with that, we know some people! They’re RamseyTrusted insurance experts who live in your area and can walk you through the ins and outs of adding an umbrella policy to your coverage. They’ll take a good look at your overall wealth picture and make sure you have enough coverage to protect your future. They’ll also shop around to make sure you get the best rate.

Leo O. bundled an umbrella policy with his home and auto insurance through a RamseyTrusted agent and got $1 million in coverage for around $150 a year.

“It’s a no-brainer for the extra liability coverage!”