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What Is Umbrella Insurance? And How Does It Work?

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. It’s your money’s best friend. Let us explain why.

What Is Umbrella Insurance?

Umbrella insurance is extra liability coverage. This type of insurance protects you (plus your family and any other members of your household) from large claims or lawsuits that go above your other insurance policies, such as homeowner’s or auto policies.

How Does Umbrella Insurance Work?

Imagine this scenario: You’re driving your SUV in the rain. You’re late to work and going too fast, and suddenly you hydroplane into oncoming traffic. Your SUV slams three sedans, resulting in $80,000 in car damages. You injure six people and the medical bills come out to $550,000. One of the drivers discovers that you’re wealthy, and because the car accident caused him "emotional trauma," he’s going to sue you for $370,000.

Protect your home and your budget with the right coverage!

In seconds, that one accident cost you $1 million in damages and injuries. You have $500,000 in liability coverage on your auto insurance, which means you need to come up with the other $500,000 fast.

Enter umbrella insurance. Instead of clearing your retirement fund or going back into debt, umbrella insurance will cover the remaining $500,000 your auto insurance didn’t cover and all the court fees associated with the lawsuit. See why it’s your money’s best friend?

Why Do You Need Umbrella Insurance?

You’ve worked decades to build up your savings and investments. Decades. Unfortunately, that money could be gone in the blink of an eye because of a nasty lawsuit.

That’s why you need umbrella insurance if you have assets that are worth more than $500,000. Umbrella insurance protects all of the hard work you’ve done to build your nest egg. Without it, you’re setting yourself up for financial risk.

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


$1 million?

$5 million?

Guess higher. Here are just three examples of how much you could be sued:

  • A teenager in Florida drove an ATV unsupervised on his neighbor’s property. He had a serious accident and died. His family sued the neighbors and got $20 million.

  • A 4-year-old suffered a spinal cord injury in a car accident. The family sued the driver and got $29 million.

  • A multi-car accident in California left a 21-year-old in a coma for one month. The driver who caused the accident was sued, and the court awarded the 21-year-old $49 million.1

Folks, that’s only the surface of it. Keep in mind that none of these acts were malicious or intentional—they were accidents. But those on the losing end of the lawsuits lost millions. People, that’s a problem!

Who Needs Umbrella Insurance?

If you are starting to build up some wealth in your retirement accounts, are making good money, and have a paid-for home or at least sizeable equity, you need umbrella insurance. And if you have a net worth of at least $500,000, you definitely need it. It’s one of the best buys in insurance—$1 million in coverage costs about $150–300 each year.

What Does Umbrella Insurance Cover?

Umbrella insurance covers you for lawsuits and very expensive claims. In particular, you’ll have extra coverage in the following four areas:

Bodily Injury

Whether your neighbors’ kid breaks his arm on your trampoline or your dog bites someone, umbrella insurance will help cover the medical bills or lawsuits that exceed the limits of your homeowner’s insurance.

Injury to Reputation

Slander. Libel. Defamation. If you injure someone’s reputation, whether in person or over social media, you could be sued for a large amount. Umbrella insurance will cover you if you lose these lawsuits.

Property Damages

If you get into an accident and the repair costs exceed the liability on your auto insurance, umbrella insurance kicks in to cover the rest of the costs. It can even cover you if you rent equipment. For example, if you rent a Jet Ski and you lose control and smash the dock, your umbrella insurance may help you with the repair costs.

Court Costs

That’s right, umbrella insurance will even cover your lawyer fees when you have to defend yourself in a lawsuit.

What Does It Not Cover?

Umbrella insurance won’t cover everything under the sun. Be aware of these four cases where umbrella insurance doesn’t have your back.

Personal Property

Umbrella insurance won’t cover damages that you make to your personal belongings. 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 has damaged your pool, don’t expect umbrella insurance to cover the repair costs.

Criminal Acts

If you hurt someone on purpose, whether that means injuring them or damaging their property, umbrella insurance won’t cover the injuries you cause or the lawsuit that follows.

Flood Damage

Just like homeowner’s or renter’s insurance, umbrella insurance doesn’t cover damages caused by floods. You need a flood insurance policy for that. Now, if you accidently flood your apartment, and your neighbors sue you for the damages you cause to their apartment, umbrella insurance will help with that lawsuit.

Contracted Worker Injuries

If you hire workers through a construction company, they should have their own insurance. Sometimes, however, you sign a contract that makes you responsible for the workers. Read the disclosures carefully. If you sign a contract that makes you liable for the workers, and one of them gets hurt on your property, umbrella insurance will not cover you.

How Do You Buy Umbrella Insurance?

In order to buy umbrella insurance, you must have a homeowner’s or auto insurance policy. Umbrella insurance is an add-on to an already existing policy, and you can’t buy it separately. Work with an independent insurance agent who can help you buy the right amount—you may be able to bundle umbrella insurance with your home or auto insurance to save on your premium.

How Much Does Umbrella Insurance Cost?

For the coverage you get, the price is dirt cheap. You can easily get $1 million of coverage for $150–300 a year.2 Have an independent insurance agent shop around for you.

Is There a Deductible?

No. You will pay the deductible on your homeowner’s or auto insurance first. Then, when your umbrella insurance kicks in, you won’t have to pay the deductible again.

How Much Umbrella Insurance Do You Need?

Umbrella insurance starts at a minimum coverage of $1 million. You may think that’s enough, but don’t get stingy. You want to buy enough umbrella insurance to cover your net worth, so the more assets you have, the more umbrella insurance you need to get. You may be surprised how affordable it is.

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.

8 Signs You Need Umbrella Insurance

If more than two of the following eight scenarios apply to you, you definitely need more than $1 million in umbrella insurance. And to be certain, take our 5-minute coverage checkup to make sure you have what you need.

1. You have vacant land.

Do you have a pasture or beachfront that’s easy to access? If someone gets hurt on your land, they can sue you, even if you didn’t invite them.

2. You have recreational vehicles, such as ATVs, dirt bikes, Jet Skis or boats.

Adults can be responsible drivers of these vehicles (maybe), but what happens when your teenage son’s buddy takes the dirt bike out when you’re not looking? These vehicles are fun to play with, but lethal if someone gets hurt.

3. You regularly invite people over to your home.

Part of the joy of a paid-for home is playing the host and having parties. But if you host a party or an event and your guest list is extremely long, you’re definitely putting yourself at risk for an accident—and a lawsuit.

4. You have "attractive nuisances."

If you have something on your property that could attract a curious child, you have what insurance companies call an attractive nuisance. Trampolines, pools, playgrounds, treehouses and blow-up castles can all cause injury. If you have one or more of these attractions, make sure you have enough umbrella insurance to back you up.

5. You drive a luxury car.

When you drive a $100,000 sports car, you paint a huge target on your bank account. Don’t assume people won’t try to sue you for more money if you cause an accident.

6. A close family member shares strong opinions online.

Maybe you don’t like social media, but your son does. If he says something close to slander, libel or defamation, you could easily face a lawsuit, especially if the public knows your son comes from a wealthy family.

7. You rent out your property.

If a tenant gets injured on your property, they could sue you for an amount that exceeds the liability on your landlord’s insurance.

8. You have a public profile of success and wealth.

If people know you have money, they will not hesitate to sue you. If you have a net worth that’s above $5 million, you better have a lot of umbrella insurance.

Get the Coverage You Need

Here’s the deal: If you have wealth, you are 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? Find your local recommended independent insurance agent who will shop around for you to get the right insurance at the right price. They’ll evaluate your assets and determine how much umbrella insurance you really need.

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.

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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