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When Do You Need an Umbrella Policy?

liability insuranceI recently got renewal documents in the mail for our umbrella policy. What is an umbrella policy and why on earth do we have one? Excellent questions! I can’t say  whether or not you need one, but here’s why we decided an umbrella policy made sense for us.

What is an Umbrella Policy?

No, it isn’t a policy to cover your umbrellas (HA), but extra coverage in addition to liability limits you already have on your vehicle or home insurance policies. In Colorado, the highest liability limits you can have on those are $300,000 per occurrence. If we were at fault in a car accident, anyone could sue us.

Maybe the medical costs from an accident might be over  $300,000, or maybe we live in a small town where people know we own quite a few things and might have a little money. The umbrella policy also covers us if someone is hurt on our home or rental property.

A few years ago, I also had the misfortune of having a former employee try to file a suit against me for a number of reasons. Her case had no merit and didn’t get anywhere, but if she had sued me and won, the umbrella could have kicked in to pay a settlement.

Sadly, in the US, people can sue you for practically anything. If they can find a lawyer to take the case and get to court, you never know what might happen. I know that is a rather pessimistic view of society, but after the one jilted employee, my view of people and their motivations certainly was shifted. An umbrella policy does not guarantee I’ll never have to worry, but it makes me worry lots less.

Do You Need an Umbrella Policy?

I’d say it depends. If you don’t have any assets and you get sued, they can’t get blood from a turnip. However, courts can garnish your current and future wages. It might not make sense to sue someone who obviously had no money, but if someone thought you might in the future, you never know.

If you do own a home or have some money put away, it could be fair game in a lawsuit. Employee sponsored 401k plans are usually shielded, but solo 401k’s or IRA’s might be vulnerable to a settlement depending on where you live.

How Much Does This Umbrella Cost?

The wonderful thing about umbrella policies and why I think almost everyone needs one is that they are very cheap. If you insure your home and cars through the same carrier, adding an umbrella costs very little.  For an extra $1 million dollars in coverage, our umbrella costs $224 a year. For under $20 a month, we get that much more peace of mind. You can get umbrella coverage for up to $10 million, but I think what we have is adequate.

Odds are that we’ll never need to use our umbrella policy. I certainly hope the $224 a year turns out to be a total waste of money. However, to help me sleep better at night, paying less than $20 a month is well worth it. 

Do you have an umbrella policy? Is $1 million enough coverage? 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.


  1. Honestly, I don’t know about umbrella policy and thanks for explaining it briefly. Yesterday, I just applied for another life insurance, it’s better to be prepared than sorry at all.

    • I hate to think about life insurance, but I’d hate it more to leave my family in a bind if something were to happen to me.

  2. I don’t have an umbrella policy but I really want to take a deeper look at insurance options this year and see if there is additional insurance I need to purchase. I think it’s a bit ridiculous that employee sponsored 401ks are shielded but solo 401ks and IRAs are not – crazy!

  3. This is something Nicole and I have put off for way too long and are actually meeting with someone next week to rectify that as we’re also finally getting liability coverage for the business. We’re thinking either $1 or $2 million will be adequate. I hope it’ll turn out to be a waste of money as well, and something we never have to use. 🙂

    • I hate the need for such things, but you just can’t go without. If you did do something negligent that would be bad enough, but I’ve seem people completely lie to try and get money for however they feel they were wronged. Just too risky not to be over prepared.

  4. I have had an umbrella policy for years, and now that my kids are old enough to drive I won’t be cancelling it any time soon.

    Years ago my boss pulled everyone into a meeting to explain the importance of having an umbrella policy. His son was the driver in a fatal car accident. Several of his high school classmates were in the car and one lost his life. The family sued. His umbrella policy saved them.

    • Teenage drivers might be the biggest reason for an umbrella. We might need to increase our coverage when we get to that point!

  5. Whenever I discuss insurance with clients, we look at the cost benefit analysis. For my clients who have assets to protect and need the shield of an umbrella (just like my hair does in the rain), then I absolutely insist they get the coverage. You are right, we live in such a litigious society that you never know where your risks can come from and if you have something worth protecting, then it is worth the investment.

    • At the time we were going through all the issues with the disgruntled employee, it was almost paralyzing to think about what might happen if she somehow convinced the legal system that her claims were legit. After that incidence, I don’t ever want to be without extra protection.

  6. We have an umbrella policy because of all of the little things we’ve got going on- rental properties, a business, etc. It’s nice to know we have that extra coverage is something went terribly wrong.

  7. We’ve had a $2 million umbrella policy for several years now. In the overall scheme of things it is the best bargain around. When you hear about people getting multi-million dollar settlements for frivolous reasons, the couple of hundred you pay for thins insurance is money well spent.

  8. We’ve had one ever since we got assets that we wouldn’t want to lose. They’re cheap and you never know when you’re going to get sued by a person who rear ends you on the highway. The really nice thing about it is that the insurance company will hire an attorney and go to bat for us in court. So it’s an extra layer of protection because their best interests are the same as ours.

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