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Umbrella Insurance: How It Works and What It Covers

You’ve worked hard for your money, as the song goes, and you’ve finally built some wealth. You’re well on your way to reaching the million-dollar mark by the time you retire—but you’re worried. You’ve heard stories of friends who lost everything in lawsuits and had to start all over again.

You shouldn’t have to worry about being sued for no good reason and letting somebody take what you’ve worked for. So how do you protect yourself—and your money?

It’s called umbrella insurance. Umbrella insurance provides coverage for lawsuits and large claims that aren’t covered by your homeowners or auto insurance policies. 

We’ll answer all your questions about what umbrella insurance is, how it works, and what it covers. It’s pretty much your money’s best friend.

What Is Umbrella Insurance? 

First, let’s talk about your auto and homeowners policies. In addition to covering damage to your car and home, they also provide personal liability coverage that kicks in if someone is injured on your property or if you injure someone (or their property) in a car accident. But that coverage has limits. Meaning if you’re sued, those policies will only cover up to, say, $100,000 in damages. But if you have a higher net worth, you could bust through those limits pretty quickly.

 Do you have the right insurance coverage? You could be saving hundreds! Connect with an insurance pro today!

So what can you do? 

Umbrella insurance helps fill those gaps in your homeowners, auto, and even boat insurance policies. Umbrella insurance is a form of personal liability coverage that protects you (plus your family and other household members) from large claims or lawsuits that go above your other insurance policies. Just like an umbrella for the rain that protects you from getting wet, umbrella insurance protects your money by filling the financial gap that your primary liability insurance doesn’t cover.

How Umbrella Insurance Works

Let’s say you’re driving home after visiting relatives for Thanksgiving. Traffic’s bad, and you end up in a horrible 10-car pileup. Several are injured, but you’re okay. But it gets worse when you find out the accident was your fault.

Now you’re liable for the vehicle damage and medical bills of all the other drivers in the accident. Two of the drivers sue you for lost wages from missing work, and you’re suddenly looking at a $700,000 bill. Your car insurance liability limit only takes care of $100,000, meaning you have to foot the other $600,000.

Umbrella insurance would swoop in and take care of the $600,000, including legal expenses. Wow! Talk about a game changer for your savings and assets. That’s the power of umbrella insurance. It prevents you from wiping out your savings or going back into debt.

It also works the same for homeowners insurance. So if you host a huge Christmas party and Santa slips on your icy steps, breaks his arm, and sues you (c’mon, Santa!), you’ll be covered for any legal fees or court judgments (if you lose the lawsuit) above and beyond your home insurance liability limits.

And one more piece of good news. There is no separate umbrella insurance deductible. Once you pay your primary policy deductible (auto or homeowners), you won’t have to pay the deductible again.

What Does Umbrella Insurance Cover? 

So, what’s under the umbrella? What does umbrella insurance cover? If you have umbrella insurance, you’re protected in these five main areas:

Bodily Injury

Everyone knows skydiving is risky. You know what else is risky? Your kids hosting a neighborhood trampoline party. And if one of those kids breaks their arm (party’s over, kids!), umbrella insurance has your back. It will help with medical bills or lawsuits—if the parents get really upset.

Bodily injury protection also covers things like pet incidents (dog bites) and car accidents. So if your pooch decides it really doesn’t like your neighbor and goes into attack mode, you’ll be covered if your neighbor decides to sue you.

Legal Fees

Lawyers are expensive. So if someone sues you—whether it’s justified or not—you could be facing some pretty hefty legal fees. And the last thing you want is to pay out of pocket to defend yourself. Don’t let others take a piece of your hard-earned money—get umbrella insurance.

Injury to People’s Reputation

Slander. Libel. Defamation. If you damage someone’s reputation, even if it’s online, you could be sued for a boatload of money. Umbrella insurance will protect you if you’re at risk of any slander, libel or defamation lawsuits. For example, a restaurant could file a lawsuit against you for writing a negative review online. (Be careful.)

Property Damages

Umbrella insurance covers you if you get into a bad car accident and the repair costs to people’s property are more than your car insurance’s liability limits. It even covers rental equipment, like if you crash a rented Jet Ski into the dock (oops). Or if your kid accidentally damages school property. You’re covered.

Rental Property

If you own rental property, umbrella insurance can give you extra coverage from liability you have as a landlord. So if someone breaks their ankle on the steps of your rental property and sues, you’ll be protected.

What Isn’t Covered by Umbrella Insurance? 

Umbrella insurance doesn’t cover everything. Here are some of the incidents that fall outside that umbrella:

Personal Property

When it comes to you accidentally damaging your own stuff, umbrella insurance won’t help with that. This is because it’s a liability policy, meaning it only kicks in if you’re at fault for harming other people’s property. So, if you thought driving your motorbike into the pool was a good idea (you were trying to ramp over it, right?), and now the oil and gasoline and brake fluid have damaged your pool, don’t expect umbrella insurance to cover the repair costs.

Intentional Harm

If you hurt someone on purpose or damage their property intentionally, umbrella insurance isn’t going to bail you out. You’ll be paying those medical bills or lawsuits out of your own pocket. Just another reason crime really doesn’t pay . . .

Water Damage

A lot of people assume flood damage is covered by property insurance. Nope. And umbrella insurance is no different. If you live in an area prone to flooding, you need separate flood insurance

That said, if you accidently leave the bathtub faucet on, flood your apartment, and your neighbors take you to court for water damage in their apartment, umbrella insurance covers lawsuits in that situation.

Business Incidents

If you own your own business, umbrella insurance won’t help with those kind of liability incidents. You need commercial insurance for that.

Contracted Worker Injuries

If you’re remodeling your home, make sure your contractor carries their own insurance. This is because your own umbrella insurance won’t cover you if a worker gets hurt on your property. Some people accidentally sign a contract that makes them liable for the workers. The moral of the story? Read the fine print. And while we’re talking about construction companies, umbrella insurance also won’t help if you’re sued for not keeping your end of the bargain in a contract.

War-Related Expenses

World War III? The zombie apocalypse? Umbrella insurance won’t touch war-related expenses with a 10-foot pole (it’s not that big of an umbrella, folks). So don’t expect your umbrella insurance policy to pay for damages to your belongings or property.

umbrella insurance coverage

Is Umbrella Insurance the Same as Excess Liability Insurance? 

Sometimes umbrella insurance is mixed up with excess liability protection. But don’t be confused. These are two different policies.

Excess liability insurance is an extra layer of coverage added to, for instance, a homeowners insurance policy. It gives excess coverage in areas that are already protected in a standard home insurance plan. But it doesn’t cover the same things an umbrella insurance policy would. For instance, excess liability doesn’t help with slander or libel lawsuits.

Do You Need Umbrella Insurance? 

Now, you might still be wondering how to know if you need umbrella insurance.

If you have a net worth higher than $500,000, you definitely need umbrella insurance. Or if you’re making good money, starting to build up some wealth in your retirement accounts, and have a paid-for home or a good chunk of equity, you also need it. Otherwise, you’re setting yourself up for financial risk.

Basically, the more assets you have, the more you have to lose. And a lot of folks are willing to sue over just about anything these days, so wealthy people often have a target on their backs.

If someone suffers a serious injury on your property or is in a car accident that was your fault, how much do you think you could be sued for?

$500,000?

$1 million?

$5 million?

More?

Oftentimes, yes.

But with a rock-solid umbrella insurance policy, you won’t be staying up in the middle of the night worrying about expensive lawsuits wiping out your hard-earned wealth—or who you might have offended on the internet. You’ll have peace of mind knowing your money is protected.

How Much Umbrella Insurance Do I Need?

Now let’s take a look at how much umbrella insurance you might need.

Umbrella insurance starts at $1 million worth of protection. You might think that’s enough, but now’s not the time to go bare-bones.

The rule of thumb is that your umbrella policy should cover your entire net worth. You might need more than the $1 million minimum coverage if more than two of the following apply to you:

  • 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

After you’ve calculated your assets, ask yourself, How much risk do I have of being sued? Chances are, you’re more at risk than you think.

How Much Does Umbrella Insurance Cost?

For the amount of coverage you get, the price of umbrella insurance is dirt cheap. You can easily get $1 million of coverage for $150–300 a year.1

It gets even cheaper after the first $1 million. It costs an additional $75 for $2 million in coverage and then $50 for every million dollars of coverage after that.2

Protect Your Money and Future

If you have wealth, you’re at risk of being sued. It doesn’t matter how nice and friendly you are. And it definitely doesn’t matter how much time and energy you’ve put into getting out of debt, building savings, and growing your investments. All it takes is one nasty lawsuit to take it all away.

If your net worth is above $500,000 and you don’t have umbrella insurance, what are you waiting for?

One of our independent insurance agents who is part of our Endorsed Local Providers (ELP) program can assess your specific situation and figure out exactly how much umbrella insurance you need. And they’re RamseyTrusted, so you know you’re working with top agents.

Our ELPs can walk you through how to add an umbrella policy to your homeowners or auto insurance. You might even be able to bundle umbrella insurance to save.

Don’t put this off! Protect your assets today and experience the peace of mind that comes from knowing your wealth is off-limits to other people.

Connect with an ELP today to get free umbrella insurance quotes.

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.

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