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How Much Umbrella Insurance Do I Need?

If dogs are man’s best friend, umbrella insurance is your money’s best friend. It’s the defensive part of your wealth-building plan, protecting the money you’ve worked so hard to save from all kinds of random bad (expensive) things that could happen. Our rule of thumb: If you have a net worth over $500,000, you need umbrella insurance.

So you know you need it, but you’re still wondering, How much umbrella insurance do I need?

Don’t worry! 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? 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.

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.

Why Is Umbrella Insurance Important? 

You’ve worked hard to build up wealth. But much of it could be wiped out pretty quickly if you don’t have the right coverage.

Umbrella

You’ve worked hard to get to where you are. But don’t leave yourself vulnerable.

Let’s say you’re driving home from work and you end up in a really bad accident. You’re found to be at-fault and now people are lining up to sue you for damages, including emotional trauma. You’re suddenly staring at a $600,000 bill! Your car insurance liability limit only takes care of $100,000—meaning you have to pay the other $500,000 out of pocket.

Like a superhero, your umbrella policy swoops in and handles the $500,000. Meaning you don’t have to wipe out your savings or go back into debt.

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.

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 an employer-sponsored retirement account, 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.

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 kids' 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 are 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.

Is Umbrella Insurance Worth It? 

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.

Cons

  • You usually can’t just buy umbrella insurance on its own. It has to be attached to an existing auto or homeowners insurance policy.
  • To add umbrella coverage, you also have to have a certain minimum level of liability coverage in your auto or home insurance policy. (Most insurers require around $250,000 in auto insurance liability with $300,000 in homeowners liability.)1 And boosting these liability coverages will probably increase your premiums.

Pros

  • The extra liability coverage fills in gaps in your auto or homeowners insurance policies.
  • Umbrella insurance gives you a ton of extra protection in case you’re sued or have large claims filed against you.
  • A lot of times umbrella insurance coverage applies no matter where you are in the world.
  • Again, umbrella insurance is affordable. You can easily get $1 million of coverage for $150–300 a year.2
  • It even covers some rental equipment (like a Jet Ski rental).

How to Buy Umbrella Insurance 

The last thing you want is for someone to take a bite out of your money. If you’re ready to buy umbrella insurance, there are a couple ways to do it.

You could continue to research a little more, then shop around, compare companies, rates, coverage amounts, and buy on your own.

Or . . .

You could work with one of our independent insurance agents who is part of our Endorsed Local Providers (ELP) program. They’ll take a good look at your overall wealth picture and make sure you have enough coverage to protect your future. And they’re RamseyTrusted, meaning we’ve vetted them for you and you’ll be working with the top agents.

Let an ELP shop for you!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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