How Does An Umbrella Policy Work And How Much Does It Cost?

We've talked about all the different types of auto insurance. I'd like to now talk about whether you should get an umbrella policy. An umbrella policy is also known as a personal liability insurance (PLU). This article will specifically describe how does an umbrella policy work and how much does it cost.

When you've spent a lifetime building assets for your retirement, the last thing you want is to get sued for all you're worth! Accidents happen all the time and the more you are worth, the more the injured person may go after your assets.

How An Umbrella Policy Works

Let me share an example of how an umbrella policy can protect the policy holder.

If someone in a $230,000 Porsche 911 Turbo runs you over after running a red light, you're probably more inclined to hire a lawyer and sue for big bucks.

However, if someone in a 1985 Honda Civic runs you over, you may think getting financial remedy is not worth it. If you are the person with the Porsche, you probably want to get an umbrella policy.

Auto insurance policies only cover so much. My auto insurance policy has a maximum $500,000 liability per accident. I could get more liability, but the increase in premiums would make my insurance less worthwhile. Because I have assets well over $500,000, I elected to get an umbrella policy to cover the rest of my estimated net worth.

However, you don't need to get an umbrella policy to cover your entire net worth if you do not wish.

The chances of me getting sued for over $500,000 are slim because: 1) I've got to be found negligent in the accident, 2) I've got to create massive damage in the accident, 3) The victim needs to go through the process of suing, 4) The victim needs to win, 5) Cases are usually settled out of court for less, 6) I drive half the national average, 7) I'm a pretty careful driver with a slow car, and 8) I'm a nice guy!

Unfortunately, even nice guys get unlucky sometimes.

If I do get sued for say $1 million, I'm protected because my auto insurance coverage will kick in to pay the umbrella policy deductible, and then my umbrella policy covers me for the rest. The only out of pocket expense I incur will be my auto insurance deductible of $1,000.

Why Get An Umbrella Policy

Here are some reasons and examples for why you should consider getting an umbrella policy.

1) You drive a fast car and have a net worth of $1 million dollars.

You enjoy hitting the bars and clubs every weekend in your $75,000 BMW M3. Your hobbies include snowboarding, rock climbing, sky diving, and poker. Given you go out on the weekends, you also tend to have at least one drink before getting behind a wheel. At the age of 36, you just don't want to settle down and have amassed a nice nut.

Assessment: You are higher risk than average. Get an umbrella policy with liability coverage of at least $1 million if not $2 million given you're in the growth phase of your career. Also get comprehensive auto insurance that covers the damage of your car and liability of around $500,000 per accident.

2) You drive a $12,000 SUV, have a 12 year old son, are a homeowner, and worth $3 million dollars.

You never go out to party on the weekends anymore (partly thanks to the pandemic). Your idea of a good time is snuggling up with your husband to watch Revenge on DVD. In six years, your son plans to go off to college at a cost of $50,000 a year for 4 years. You also have a homeowners insurance policy with $500,000 in liability coverage and a $5,000 deductible.

Assessment: You are an average risk person. Get an umbrella policy with liability coverage between $2 million to $3 million. Weight the value of peace of mind vs. the increase in monthly premiums for higher coverage.

Make a decision what the likelihood is that you will be sued for your entire net worth. $3 million is a nice figure that lots of people would love to lay their hands on. Your SUV is probably not worth getting comprehensive auto insurance, so just got with liability. If it gets destroyed, it sounds like you can easily buy a new one.

Given the huge increase in real estate values since the pandemic began, your homeowner's insurance policy likely needs to be increased. My favorite way to find an affordable homeowner's insurance policy is with PolicyGenius. You can get great real quotes in minutes, all in one place.

3) You drive a $8,000 Honda Accord, are the only working spouse, have three children, are a homeowner, and worth $800,000.

You spend all your time at the office and then at home with the kids. Seldom do you ever go out. You've sworn off alcohol ever since you drove your car straight into a tree six years ago. You are working like a mad man to provide for your family and wonder whether tuition costs will continue to spiral out of control. Every time you think of the fact that three people are depending on you, you start to get a panic attack.

Assessment: You are an average risk person who definitely needs an umbrella policy. You do everything a normal person would do as determined by the insurance actuaries, but you've got three dependents. If something happens to you, or you cause an accident, a lot of people will be negatively impacted.

Not only get a $1 million umbrella policy get another $1-2 million in term life insurance policy that will go towards your kids if you die. A comprehensive auto policy is probably a waste of money, but it depends on your liquid assets and how safe of a driver you are now.

4) You have two teenagers and a net worth of over $1,000,000.

Try as you may, you feel you can no longer control your children. They aren't very good students, aren't going to win any athletic scholarships, hang out with the wrong crowd, and have a lot of angst. Because you don't want to be the uncool mom, you allow your teenagers to drive.

Assessment: Your teenagers put you at huge risk because you are responsible for all their actions before the age of 18. Everyday you pray they come home safe. Absolutely get a $1 million umbrella policy! Your teenagers could bankrupt you in a heartbeat!

5) You are a landlord and/or business owner with a $500,000 net worth.

When you have customers, you invariably open yourself up to more risk. I feel sorry for doctors who are trying to save lives but constantly operate under the assumption they will get sued by their patients.

As a landlord, no matter how hard you screen your tenants or assess the safety of your unit, something bad may happen. Same thing goes from running any business.

Assessment: You absolutely should get an umbrella policy worth $1 million or greater for potential garnished wages. Landlords should have landlord insurance and business owners have various business insurance options. The world is a very litigious place. Live the American dream but protect yourself.

Example Where You Don't Need An Umbrella Policy

Of course, not everybody needs or wants an umbrella policy.

Let's say you drive a $27,000 Jeep, earn $65,000 a year, are married with a non-working spouse, have no children, do not own a house, have $8,000 in credit card debt, and are worth a combined total of $60,000.

At the age of 27, your vehicle is a blight on your finances because of the cost. All that money spent paying the monthly payments could go towards a downpayment on a house, or investments in the stock market. You still feel young and invincible with an attitude that you can work forever!

Assessment: You are a risk taker because you're putting your life in harm's way with poor financial habits. As a result, you will likely never amass a net worth even close to $1 million. This is great because you therefore don't need an umbrella policy. Your expensive comprehensive auto insurance policy which acts as a lead balloon on your net worth will do.

Don't Get Too Big Of An Umbrella Policy Either

Umbrella Policy

How much insurance you have can be estimated via public records. If you are deemed at fault in an accident, by the time a lawyer calls you they will make a guesstimate as to how much insurance coverage you have.

If you have a net worth of $1 million, but have an umbrella policy of $5 million, guess what? The lawyer is probably going to be more motivated than if you had a smaller policy. After all, it costs the same to sue someone for $1 million or $5 million. 

The irony is, if you had no umbrella policy and only an auto insurance liability coverage of $300,000, the lawyer may not want to pursue, or will go for a maximum of $300,000, even if you have millions of dollars in net worth. This now becomes a game of how good you are at hiding your assets!

Insurance companies also don't want you to have more umbrella policy than you need due to their liability reasons obviously. You pay the monthly or yearly premiums, but they pay the full amount.

The good thing to note is that the higher your umbrella policy, the more inclined your insurance company will be to fight for your rights!

Umbrella Policy Insurance Amounts Depends On Your Situation

You can certainly go without an umbrella policy, but I wouldn't recommend it if you have a net worth beyond your auto or homeowners liability coverage.

My auto insurance liability covers $500,000 per accident. Sounds like a lot. However, what if I cause a 10 car pileup on the freeway? Suddenly, $500,000 doesn't seem like that much anymore.

You've got to check the latest insurance rates and make an informed decision. According to the Insurance Information Institute, a $1 million umbrella policy typically costs between $150 to $300 a year.

Each incremental $1 million dollars of personal liability insurance costs on less and les. Here is what it will cost me for various levels of umbrella policy with my insurance company. Here is what an umbrella policy will cost me after checking with AllState, a trusted insurance provider.

Average Cost Of An Umbrella Policy In 2021

An umbrella policy's cost depends on your personal situation as highlighted above. Umbrella policy rates will be different for everyone. Here are some average quotes I found after checking three insurance carriers.

  • $150 – $190 a year for a $1 million umbrella policy.
  • $285 – $335 a year for a $2 million umbrella policy.
  • $365 – $430 a year for a $3 million umbrella policy.
  • $525 – $610 a year for a $5 million umbrella policy.

As you can see, it generally costs about $150 more a year for $1 million more in umbrella policy coverage. If you are worth in the millions of dollars, you won't even notice a difference in premium costs. Even if you are only worth $500,000, $185 a year is chump change for your peace of mind.

Hence, my recommendation is to cover yourself for the full amount of your net worth up to 50% more to account for growth. In other words, if your net worth is $2 million dollars, get an umbrella policy worth $2-3 million dollars.

When it comes to insurance, I always believe it is better to be safe than sorry. If you are wavering to get an umbrella policy, then you most definitely already need one!

Related Reading: Three Things I Learned From My Estate Planning Attorney Everyone Should Do

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How Does An Umbrella Policy Work And How Much Does It Cost? is a Financial Samurai original post.

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91 thoughts on “How Does An Umbrella Policy Work And How Much Does It Cost?”

  1. 1. I live in AZ and my kid is in medical school in Florida. We pay the tuition. In AZ we have an umbrella. The ins company said he/she needs to get an auto policy in Florida. But, our AZ umbrella wouldn’t cover that. What do we do?

    2. I have a kid who will be going to a big city to college and won’t be driving. Can I drop him/her from our auto insurance?

  2. The damages in car accidents can include medical bills and lost wages, future medical treatment, therapy, surgeries, and rehab, as well as potentially a lifetime of diminished earning capacity.
    The aggregate of these damages can exceed seven figures in a heartbeat. And this makes taking out an umbrella policy worth the price.

  3. I own 2 cars 05 Chevy 06 caddy outright. I have full coverage and 250/500 liability. 1 million umbrella, why do I need liability if I have an umbrella policy?

  4. Glad I came across this article. It seems all articles about umbrella coverage are written by insurance companies which are of course heavily biased.

    I’m surprised how cheap umbrella insurance is. A good life insurance plan is pretty cheap as well. It seems anyone with any sort of dependents should really look into both. Thanks for the great info.

  5. Great post. I would like to learn about few more things:
    Does your primary residence play a factor – as in number of years of loan and how much you owe to bank. In my case, I still owe half the net-value of my home to the loaner.

    I and my spouse work, household income of $225K, no kids. Drive 10 yr old car probably worth less than $5000. Not counting primary residence and 401K, my net worth is $400K. Would I need an umbrella insurance? For my auto insurance, seems like going with high deductible ($1000) and $500K liability might do it?

  6. If I purchased a 1 million dollar umbrella policy and have an accident and am sued for 2 million dollars, my underlying auto policy payed out its limits at $250,000 leaving me liable for $1,750,000. Will my umbrella pay an additional 1 million on top of the $250,000 leaving me with a liability of $750,000, or 1 million? In other words is my umbrella 1 million cover include my auto liability limit or is over and above my auto liability limit?

  7. If you have $3 in assets and purchase an umbrella coverage for 4 or even $20 million if you are sued for $40 million or more. Nowadays, people get sued for ridiculous amounts of money for ridiculous reasons. So why bother having an umbrella policy at all?

    1. Correction, I meant if you have $3 million dollars in assets. My divorce lawyer told me that he was working on a case worth 8 figures. Who can afford this level of coverage?

      1. Bryan Henderson

        To me, that’s the supreme irony in liability insurance. Your exposure is your net worth plus your insurance. So you cannot buy enough of it to give you peace of mind, and the more you buy, the more you’re paying for something that will most likely benefit only your victims, because in the case of a mega-accident, you’re going to wiped out regardless, lose all you’ve spent a lifetime building, and have to start over.

        To fix this, insurance policies should be excluded from bankruptcy. Then, the most you’d owe someone would be your net worth, you’d carry enough insurance to replace your net worth, and you’d have a predictable retirement. Victims already accept the risk that whoever injures them doesn’t have insurance, so it’s no less fair to them.

      2. You want to have enough umbrella and auto insurance so that the plaintiff and their attorney (who’s getting 30-40% of the winnings), will settle for the insurance money and go away versus gamble on winning more at trial. It’s all a financial calculation to these people. Say you’re the at fault driver in a car crash that causes a brain injury to a child. The potential damages are $10M, which is well within the realm of possibilities.

        If you’re the plaintiff, you do take a for sure $2.5M policy limit settlement, or gamble on a 30-40% chance at trial you can win that $10M judgment, of which you might only collect $3.5M? And if you lose at trial, you get nothing.

        Almost anyone in that situation, and certainly the plaintiff’s lawyer who stands to pocket $1M, will take the settlement any day.

        1. It seems that most discussions of umbrella policies don’t touch on how much of your assets can be actually gone after if a monetary judgment is rendered against you. Nearly all states protect retirement plans such as IRA’s and 401k’s from being subject to collection of amounts owed under court judgments. And most states have homestead (personal residence) exemption protection from judgment creditors up to a certain dollar amount. Florida generally exempts one’s residence from creditors’ collection attempts, no matter the home value, even if it’s $100 million or more. Most persons, especially retirees,are likely more “judgment proof” than they might think.

          This is even truer for middle class retired people, whose need for any umbrella insurance is often never discussed in articles about it. For example, we are a married couple officially residing in Florida. We own our homesteaded condo here. Nearly all of our assets are in IRA’s, except for $30-40k in checking and savings. We have two cars worth $10k or less each. Nothing else except Social Security payments, which do not have a principal asset value to go after by creditors. Our auto and condo insurance both have liability protection of up to $300k per incident. I would ask Sam to opine on whether someone in our position really needs umbrella insurance. Just your thoughts, no ironclad recommendations, since everyone’s situation is different. Thanks.

  8. Got a question, If your networth is 2 million dollar and 1 million of it is in your 401K. I’m thinking I only need a one million dollar umbrella coverage because of liability protection from retirement assets? Would that be correct?

  9. Informative article. I got a 1 million umbrella policy today for about $135. It actually cost more because I was told in order to get the umbrella, I had to increase the liability limits on my existing auto insurance. I had the minimum insurance coverage on my auto before getting the umbrella. Premium on auto went up about $200 while home premium went down. Go figure, I’m still confused.

  10. Frank Marcoccia

    Very nice story. but . you DON”T NEED a 10 car Pile up to find out your going to be losing all your money..
    Here is a TRUE STORY . happened to my wife. car accident. she got hit. from Behind. went flying into a building. broken arm. etc. HERE”s the KEY TO INSURANCE folks..
    TWO PEOPLE can have the exact same accident.. same lawyer. same company same EVERYTHING. except one difference.. ( or 2 in this case)..
    1. IF the person is a SLOW HEALER.. gonna end up costing more $
    2. If the person works.. if not. lower.
    3. how long were they out of work. etc.

    So if JOE DIRT was unemployed driving in moms car. got into an accident. took a year to heal and 100k in dr. bills. he might see $300k in the end.

    But.. as in my wife’s case. slow to heal.. Broken arm didn’t heal for 6 months.. healed wrong. and out of work for over a year. Big diff on payout. .. as in her case her JOB.. they pay all $ lost. so if say you make $100k a year and was out of work for a year. they’d pay that. PLUS.. any $$ u lost in your 401k that the company wasn’t matching. etc. etc. all add’s up to over a Million bucks when your done.. plus any rasies you lost. etc.. it all gets compensated .. and as in my wifes case if you can’t return back to your job. because you have a limit on how much you can now lift. that is factored into lost income etc. etc.. so just one Minor accident can turn into a nightmare!!!

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  12. I have a friend who has been purchasing 2 policies of 1 million dollars for over 10 years now. Which means they should be covered for 2 million dollars. They had a shooting accident at their home three years ago. Their grandson went into their house unannounced with his two year old son. While the grandparents were still sleeping. The grandfather got up to let their dog outside to go to the bathroom and the little boy came into their bedroom and got grandfathers gun and shot himself. The boy did not die and the hospital bills and care are huge. He will never be the same again. The wife to the grandson has sued the grandparents for millions. Saying they are responsible for the accident. I say the boy came into the home without any notification he was coming. Anyway, the insurance company does not want to pay out for the 2 million dollar policies. What avenues do they have to collect on the insurance? They are being made to sell everything to get enough money to settle the case. What should they do?

    1. That is so tragic. Also scary. On what basis can the insurance company refuse the claim? Negligence? I assume umbrella policies would cover for “negligence” of that sort. I’ve never owned a gun because I’ve always felt that the point of owning a gun was self-defense which means a gun should be easily accessible and loaded. Which means a kid or anyone could get at it easily, too. Awfully awfully tragic. They need a good attorney to fight this. And yet, who does pay…..

      1. Bryan Henderson

        Negligence is the _main_ thing liability insurance covers, so that’s not a reason for denying coverage. One guess I have is that in some states, it’s actually a crime to have an unsecured gun that a child gets his hands on, regardless of how the child does. Liability insurance doesn’t cover money you owe someone because of your criminal activity.

        Incidentally, as the laws I’m talking about were recently passed, I think a lot of people think what happened here is a good result.

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  14. I want to have car insurance at a low price although I have one speeding ticket and one wreck on my record so far. My dad has an umbrella policy and at the moment he is saying that if I have different insurance the amount of money that he has to pay will go up. However if I stay with the insurance that he has the amount of money will not go up. I am 20 years old at the moment and still living at home. I want to get with another Insurance company that is not my dad’s because I i stayed with the insurance that he has I will have to pay more than what other companies offer. What should I do?

  15. And I thought umbrella policies were to protect you from the Penguin (remember the Batman villain with the umbrella?) Those umbrellas are dangerous!

    Anyway thanks for the insight, I’m currently shopping for such a policy and this helps break down the details a bit.

  16. I’m about to embark on a business venture and would most likely need a million dollar umbrella policy. You also reminded me to check on home insurance because it’s been awhile. Good info once again!

  17. Agree with Joshua when in some cases it is recommended to have umbrella policy even if you’re net worth 100k or something like that. Your debt collector may garnish your future wages, house, car, etc, all depending on exemptions you filled with state and state laws too.

    Of course the person who is suing you won’t have motivation to actually sue you in some cases, i.e. you’re broke or too old and have no job and low net worth.

    It is hard to give a general formula like it was proposed in this article. If you feel you need an umbrella policy and done some research, you may want to get one and avoid regretting later.

  18. I am signing an apartment lease for my son and his two college roommates. Good kids, smart, responsible. The lease requires that I get personal liability insurance! Is that common for a rental unit now? I know they should get rental insurance, but looks like I’ll be getting a PLI as well.

  19. forget to add more information. We have 2 mil. Commercial General Liability insurance to cover all rental properties. Should we cancel out this and purchase umbrella insurance instead? Son 24 and daughter 18 are under our auto insurance, will there get covered under my umbrella insurance if they get sued?

  20. My husband own a business and we have several rental properties, some under his name and some under mine. Do we need 1 umbrella insurance to cover both or 2 ?

  21. When my two daughter became of driving age, I took out a one million dollar umbrella policy with State Farm. The extra piece of mind knowing you’re protected incase of an extreme accident was worth the extra few hundred dollars. Plus, the benefit affects all of your family in home or in your automobile

    1. Great idea James; I actually had an umbrella policy when my kids were about the same age. I foolishly cancelled it at the time because I felt the premium was just getting too expensive, when in fact that’s when I needed the policy more than ever. Now it’s just my wife and I, we recently bought a new $2M umbrella policy thru State Farm for only about $250 per year. It’s a pretty reasonable price to pay for peace of mind

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