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.

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. Neal T Fromm

    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?

    1. Typically you can’t get an umbrella policy without already having a certain level of liability.

  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. Luke Sullenger

    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. Ced@Fuggingdebt

    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. James K Shaffer

    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

  22. Ups! forgot to mention, umbrella policy quote is from the same company we have our auto insurance with coverages of 300,000/300,000 and property damage liability of 100,000. We also got our homeowners thru the same company. Not sure if this makes any difference but just in case.

  23. Interesting information in your article about Umbrella Policies. With respect to the approximate prizes for the umbrella policies and the different coverages, I am assuming these are for just one person? We are a family of 4, with two driving teenagers (no one ever in an accident, kids have good grades etc…) I was quoted $769/year for a $1,000,000 umbrella coverage. Is this reasonable? Thanks

  24. If you have a family of three. Can you buy one umbrella policy for entire family or you have to buy for each individual? Do umbrella policy protect you in all event such as car accident, someone fall on your front yard and tenant coming after you? Or you also need to buy 3 different umbrella policy for car, home and rental apartment?

    1. An umbrella policy can cover your household. You have to name the people in your policy. An umbrella policy is on top of your auto and home insurance as you’ve read in this post.

  25. Silver Queen

    Very helpful article for me, as I’m pretty unschooled in the area of insurance.

    It would be nice if you dated your articles, especially since they concern financial matters. For example, I almost never read a book on personal finance that’s more than 1-2 years old because all kinds of things could have changed over a longer period (taxes, rates, etc.).

      1. Silver Queen

        Gotcha. I did look over the article top to bottom for a date before I posted, but didn’t think about the URL.

        I agree that the concepts are “evergreen”. As a newbie to your site, I’ll be interested in following your stuff. I’ve learned the hard way that financial matters are too important to let drift. (And insurance in particular is designed to be confusing!)

  26. Great post Sam! One thing I like about umbrella insurance is that the coverage is cheap. The more cars and homes you have, the higher the insurance – but the cost remains low. It is always good to have a sense of security once you’re covered by umbrella insurance.

    1. USAA is a wonderful insurance company. Unfortunately only available for military active/families etc. We have had Allstate for more than 20 years. I have no complaints with Allstate except that my former agent retired, leaving the agency and clients bequeathed to two new agents (the first lasted less than a year) in our home state who didn’t understand Umbrella policies. We also have property in Florida. Allstate and the large insurance companies are out of the Florida and coastal properties market. An Allstate agent in Florida found other smaller policies to cover our properties (2, one a rental) Then-this is where it got weird-the Allstate agent in Florida TOLD US WE NEEDED A SECOND ALLSTATE UMBRELLA POLICY TO COVER THE FLORIDA PROPERTIES (2). In fact, she said we needed to add a car to our Florida coverage before we could get an Umbrella policy there. I thought all this was odd and called Allstate and the telephone rep said oh yes, you need different umbrella policies for each state you own property in. Our home state agent was clueless. Insurance agents seem to be much less informed than in the past.

  27. Thanks for posting this- I need to check my parents have this.

    Here in Asia frivolous lawsuits don’t really exist. If you mow someone down in your car you just pay the victims family compensation.

    There was a recent case of a rich kid (Grandson of the founder of Red Bull, who is a Billionaire) who mowed down a policeman while driving his $1M Lamborghini- total compensation offered to the family was $100K USD, and this was accepted with no further issue as far as I know.

    When we move back to the USA I’m definitely getting an Umbrella policy.


      1. The cost of life is not too high in Asia. $100k was only because he came from a billionaire family. And this was a POLICEMAN who got killed, mind you?

        For a non-VIP regular person the payment to the family is only about $15K in the case of an accidental death. Crazy, isn’t it?

  28. Great run down on the umbrella policy Sam. I have never really looked into them or understood them besides comprehending the name “umbrella”. I don’t think I meet any of these scenarios, but if I ever do, then I will be sure to look deeper. Thanks for the quality run down.

  29. Basically, the more you have, the more you have to lose. Protect yourself at a relatively low marginal cost a year and sleep well.

    I don’t even notice the cost of my umbrella policy as it’s paid monthly along with my other insurance.

  30. I have an umbrella policy, because I had my rental property and you never know what tenants will do. While getting my policy, I actually learned some interesting things.

    The biggest is that the most common cause of liability is auto accidents. If you injure someone badly, you can be liable for well over $1 million, if not more (think long term care costs, etc.). Like you pointed out, your auto insurance policy only covers you so much.

    Second, when determining value of the policy, don’t just look at your current assets, but also your potential future earnings. If you get sued and are forced to pay, the judge can garnish your wages or future earnings to pay the bill. So, even if your assets are only $2 million, you could end up paying more. I factored in 10 years of earnings into my liability policy.

  31. I think if you have any kind of business, you need to get an umbrella policy. I have rental properties and blogs so I got a $2 million umbrella policy. Who knows what can happen with our tenants. One tenant just told me there is a skunk under the shed… ugh…

    1. I agree. Landlords and renters totally need umbrella policies. I’ve got landlord insurance, but that might not be enough. Thankfully, the cost for such insurance is not that great, and it is a business expense!

      Good luck w/ the skunk!

  32. I try and avoid lawyer fees at ALL COSTS! I really think those fees = leakage that could be used to negotiate directly a better deal. ARbitration is always better, as is a nice umbrella policy!

  33. Holy cow that stuff is public record?! Lawyers must love that but it seems like an invasion of privacy to me.

    I like how you have lots of examples because we all have risks even with different scenarios. It’s a good time to look into purchasing more insurance given it’s open enrollment season.

    1. Yep. When it comes down to a lawsuit, a lot of stuff is open. We can go online and see who has how much of a mortgage, owns what property, etc.. unless you do some crafty trust lawyer stuff yourself to protect identity.

      Nobody i really safe, which is why TRUST is tantamount, and something that is hugely important for me on Financial Samurai wrt content, readers info, etc. Nothing will ever be shared, and products will get vetted!

  34. I’ve actually been thinking of consolidating our home and auto insurance under the same provider and adding an umbrella policy. As a homeowner there is always the chance someone could fall in front of my house and in our overly litigious society one can never be too careful. With 3 young children to support I feel the added cost would be worth the peace of mind.


    Sam you are right about them not suing you for more than your insurance. When I was a sophomore in college I got into an accident and my maximum coverage was $25,000. My car was worth a $1000 bucks, I had a negative net worth of $30,000 and growing. After the accident the magical settlement number was $25,000, anything more than that and the lawyers knew they were better off getting blood from a rock.

    The first thing my wife and I did when we got a marriage license was go to my insurance agent and add her on to my umbrella policy. It was quite a romantic day.

    1. Those greedy bastards! Thanks for pointing your example out to buttress my point. Hopefully our friend Joshua Liu above is reading. Getting massive amounts of insurance puts a target on your back folks!

  36. I don’t understand the rule of thumb to get umbrella policy based on net worth.

    I got an umbrella policy that is much higher than my net worth (I’m young) because I think it makes more sense to protect against the amount of likely judgements, not amount of my net worth. The umbrella policy protects not only my net worth but also against wage garnishment, and additionally motivates my insurer (who also handles auto and renter’s liability) to defend me instead of settle.

    Also, I did not know insurance policy limit was public record. Where can that info be food?

    1. You can’t owe what you don’t have. Here is the other reason that you may have missed in the post. I recommend 100% up to 150% of net worth per the conclusion.


      How much insurance you have can easily be found via public records. If you are deemed at fault in an accident, by the time a lawyer calls you they will know exactly 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 going to be way more motivated to go after $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!

      1. I didn’t miss your recommendation of insuring 100-150% of net worth. I was saying that I think for you, insuring based on your net worth makes sense because you are nearly financially independent. But for those who rely on income and are still early in the process of building their net worth, doesn’t it make sense to protect only net worth when you also need to protect future income against garnishment.

        What do you mean “you can’t owe what you don’t have”? Wait, are you saying you believe judgments are limited to a percentage of your net worth?

        Where is this public record where you can easily find out how much people are insured for?

        1. So are you arguing we should get 200% or more of your net worth if 150% is not enough? What is your net worth and how old are you? What type of judgements are you looking for and what do you do?

          You are welcome to get a massive amount of umbrella policy if you are particularly reckless person in a hazardous occupation. Just be careful about the growing target you’ll have on your back. The lawyer will find the records of the other side.

          1. Sam, I think you may have a misconception on your hands about public records. I talked to the insuring party on my umbrella insurance policy and the way insurance limits are found out is only after the litigation process begins. For instance, the insurer doesn’t voluntarily disclose, nor list anywhere. I couldn’t find a state of California place for looking up policy limits, and I tried calling the California Insurance commissioner’s office as well.

            A plaintiff can definitely find out policy limits via a subpoena or during discovery, but as far as I know, it’s not a simple court record search. I considered bothering an attorney about this as well.

            As far as I can tell, your post is one of the first on Google (congrats on your SEO) about umbrella policies, but multiple people are confused about the meaning of public record.

            It’s not like finding the deeded owner on a property or tax records for a property, which are indeed public record.

            I also agree with Joshua Liu that insuring $1M as a young person can easily make sense if one is a high earner (let’s say $200K/yr). You don’t want future wages to be garnished. I honestly don’t know how common this is though, I spent time reading common court judgments and settlements and this never really seems to happen much at all. I do also see the laziness of lawyers – they are probably a third as likely to go after future assets. Juries also make decisions here too. If you already have $300-500K liability limits, probably 1-2% of incidents cost more than that. You can come up with a long-tailed distribution of auto accident risks, probably by talking to some actuaries, judgment risks, and making an informed decision. I imagine you’d see huge spikes at each round number due to policy limit jumps.

            I find that lawyers are not very data-science like when it comes to this, and lots of this data is just proprietary and not exactly easily mineable. From my own estimation, million-dollar-plus judgments are exceedingly rare. Once a lawsuit DOES begin and a lawyer decides how hard to pursue a case, a higher limit may make you a bigger target. It’s quite common to ask for policy limits on liability policies in some cases. It’s a reason why many middle class people go for $100K liability instead of $300K.

        2. Your argument totally makes sense for people in situations similar to you. I’m a pretty recent graduate who makes decent income so I’m merely aspiring to be you :) My net worth is barely positive (significant debt) but I still believe umbrella insurance is appropriate for me.

          Umbrella policies start at $1MM from what I’ve seen, and I’d be surprised if more than a few percent of readers have attained that net worth. Nonetheless, I bet an umbrella policy would be appropriate for a good portion.

          My argument extends to all liability coverage, including auto and renter’s/homeowner’s. State minimums for liability are pathetically low (25k/50k for WA I think) but it is very likely that a judgement for auto accident where I am at fault would exceed that amount — no need to even throw in an opportunistic lawyer. Even if someone had negative net worth, I would argue 25k/50k is too low for financial reasons (and also ethical ones but that’s a whole different thing).

          I posted below to elaborate on my thoughts on why the correct amount to insure is more complex than ‘% of Net Worth’.

          Thank you!

      2. Sorry, I think I am doing a poor job communicating what I mean. My overall argument is that using net worth is an oversimplified rule that is often repeated. The two big ones are income streams and asset protection.

        Here’s an example what I mean about needing more coverage than net worth due to future income: If I am a neurosurgeon fresh out of school, I may have massively negative net worth. Does this mean I am judgement proof and do not need liability insurance? No, because my future income stream is still an attractive target for lawyers to try to target and attempt to garnish..

        In many cases, you actually need much less coverage than net worth because of asset protection laws. Certain types of assets are not available to satisfy judgements. Federal and state laws shield certain asset classes from creditors; the two most relevant to most people are home equity and retirement plans (through ERISA). There are other ways to shield assets, mainly by not holding legal title in your name, e.g. through interests in entities (mainly LLCs/partnerships), through an irrevocable trust of which you are a beneficiary, etc.

        I am somewhere between these two, since I: 1) need to protect my income
        but 2) hold most of my assets in protected vehicles. I am very interested in the topics of insurance and asset protection when it comes to personal finance. Hope my contribution is helpful to others!

        1. OK, that’s more clear regarding a doctor or lawyer first starting out with negative net worths due to debt, with large earning potential.

          I will say this. Even if you earn $350,000 out of med school as many doctors do with a starting negative $150,000 net worth, it still takes perhaps 7-10 years to get to a $1 million net worth.

          Getting a policy is not one and done. You can always adjust up as the years go by.

          You’ve got to provide more of your numbers as it is too hard to discuss with guessing.

        2. $350,000 income out of med school is ridiculous. A required residency is at least 3 years after med school during which a person works 60-80 hours/week and makes around $45,000/year (around the median in the US). The debt will range from $100,000 to over $250,000. Starting salary when finished with residency is likely to be in the $150,000-$200,000 range. For higher paid specialties they will train for more, potentially many more years than 3 of residency. Eg, neurosurgery residency is for 8 years after medical school, during which wages are quite low.

  37. Kim@Eyesonthedollar

    I do have an umbrella policy, which is pretty cheap, but have to pay higher auto premiums because the cheaper places like Progressive and Geico don’t seem to offer umbrellas. Do you always have to keep your auto insurance and umbrella policy with the same company? That’s what I was told any way.

    1. I don’t think so. I so happen to have my auto, homeowner, and umbrella policy all in one so there are cost synergies as others have mentioned. I think it’s a good idea, as your insurance company will also treat you better at the margin.

  38. Isn’t the amount you need to cover does NOT include your IRAs? I was told I only needed to cover my net worth outside my IRAs – true???

    1. On April 20, 2005, President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Under the law, up to $1 million of the assets you hold in traditional IRAs and Roth IRAs, or a larger amount determined by the bankruptcy court, will be exempt from your bankruptcy estate.

      What’s more, IRA assets that came from an employer retirement plan rollover–such as a 401(k), 403(b) or profit-sharing plan–won’t be subject to the claims of your creditors, regardless of the state in which you reside or the value of your rollover assets and their subsequent growth.

      At the end of the day, the choice is up to you and umbrella policies usually go in $500,000 to $1 million increments.

      1. If retirement funds and the house you live in are protected aren’t we covering more than needed? Seems like we should subtract their value from net worth and have the umbrella policy cover that amount.

      2. what if I just want more insurance coverage due to owning my own taxi/transportation service and contracts are asking for 1 million dollar coverage would this work

        1. You have to do the math on your liabilities. 1 million works most of the time if you have less than 1 million + other insurance liability coverage in assets. It’s up to you to determine.

  39. I once did some financial work (consulting) for a Personal Injury attorney. He was pretty successful and never went after people for more than their insurance. Despite that he had an umbrella policy for $5mm. Your examples were right on! You want to protect your assets against a lawsuit.

  40. One of many reasons I enjoy Sam’s blog, is his philosophy of keeping a low-profile and the value of function over form. His recent post about envy comes to mind; if Sam got in a fender-bender, it would seem that he would be much less likely to be sued than his next-door-neighbor. Even though Sam owns his home, has a significantly higher net worth than his next-door-neighbor (who lives rent-free in a neighborhood of seven-figure homes and drives a brand-new beautiful car that indicates a status of sorts.)

    Before one is sued, a person has to 1) think you have money; 2) be convinced they can get money from you; 3) convince an attorney to represent them in the pursuit of your money. Much better not to make oneself a target. And the Umbrella Policy is great protection that nobody will know about unless you are being sued.

    1. Thanks Jay! Definitely a solid benefit to fly under the radar. When people think you are poor, or worth much less than you are, they don’t seek as much.

      The hammer tends to flatten the nail that sticks out.

  41. @JT, great point about the most legally insulated accounts (401k, 457b, IRAs, etc.). I like the way you think.

    One nice thing for homeowners in CA (trying to put a silver lining!) is that if you bought a home over the past 15 years ithas been automatically ‘homesteaded’. It also provides a bit of property tax relief every year, and is easy to file yourself with the County Assessor. This exempts a certain amount of home equity (depending on your family status) from legal judgment. It also protects some other personal possessions, and pensions, Social Security payments, etc. from being garnished for judgment.

  42. Jay @ effumoney

    Most people don’t realize they need an umbrella policy until it is too late, you cannot change the amount or add a policy while in the middle of a claim, for the policy to be in effect it has to be in place before the date of the incident regarding the claim.

    Also at least in NY where I live to get an umbrella policy requires your home owners and auto policies to have higher limits to meet the umbrella policy deductible. We already had the higher limits in place, but if you don’t be prepared for your home and auto rates to increase.

    If you have children who are of driving age you are liable for their accidents as well, so make sure you have a policy when your kids start driving. Don’t only consider car accidents as your reason for an umbrella if you have landscapers or maid service or any other professional who does work in your house, if they get hurt in your house they can sue and an umbrella comes in really handy, no one wants to get sued because the guy who cleans your gutters or chimney falls off a ladder. Lastly if you have a pool, huge liability, if someone drowns in your pool you will be sued for every penny you have and many you don’t.

    Always have enough insurance to cover your net worth, and additional depending on the likelihood of you being sued.

  43. RichUncle EL

    Thanks for the this post and sheding light on a topic that is underutilized. If it can protect you better and reduce your auto and home premiums than that is a win win.

  44. Money Beagle

    Our agent approached us a couple of years ago and explained to us that adding an umbrella policy would actually decrease our total premiums paid. We already have homeowners and auto, and adding a third policy would give us an even bigger multiple policy discount, as well as allow us to reduce some of the deductibles and such that are then covered by the umbrella policy, which actually provided for even higher limits. So, we actually pay less and have higher overall coverage limits than we would if we didn’t have the umbrella policy.

    1. Mysterious Guy

      I have a similar package deal. By being loyal to an insurance company for X amount of years in auto/house, they provide a discount for including the umbrella insurance. I’ll have to double check whether I paid overall less after I got the policy, but it’s definitely a peace of mind.

      One thing to note: if you mix/match your polices from different insurance companies, make sure that your auto/mouse insurance coverage exceeds the umbrella deductible. I’ve seen several umbrella policies that have different deductibles that could create a gap between when auto/house insurance stops and umbrella kicks in. It’s one of the reason I went with the same insurance company: they can tell me that I’m fully covered from end to end. But if you do the research right, it’s possible to mix/match.

    2. Definitely good to have synergies MB. I have everything all in one place, as well as some CDs with the firm. I think they treat me better, and don’t put up a fuss when I need to make a claim as I did once when I lost my muy expensivo watch!

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