Umbrella insurance isn’t just for millionaires or high-risk daredevils. It’s a type of extra liability coverage that could protect your home, income and savings if you’re ever hit with a costly lawsuit.
Umbrella insurance could be worth a second look if you have a house, a retirement account or even a teen driver in your household. Here’s how it works — and how to know if it makes sense for you.
What is umbrella insurance? How it works
Umbrella insurance is personal liability coverage that picks up where your auto policy or home policy ends.
Say you cause a major car accident and owe $400,000 in damages. If your auto insurance policy only covers $250,000, umbrella insurance could cover the remaining $150,000.
Most policies start at $1 million in coverage and costs begin around $25 to $35 a month (or $300 to $420 a year), depending on the insurer. But you’ll typically need to max out your underlying policies’ liability limits to qualify.
“Even if you do not own a lot of assets, what you do have needs to be protected,” says Alaina Hixson, director of sales and operations at the Churchill Agency, an affiliate of Churchill Mortgage. “If your home is your only investment and you get in a car accident that injures or even kills someone, your home and even your income are at risk.”
🔍 Learn more: Is bundling your insurance worth the discount? The pros and cons of one-stop policies
Who needs umbrella insurance?
Not everyone needs umbrella insurance — but more people might need it than they think.
According to experts, you’re most at risk if you:
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Own a home or rental property
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Have a teen driver in your household
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Host guests or events frequently
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Have a dog (especially one considered high risk by insurers)
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Own a swimming pool, trampoline, ATV, boat or other watercraft
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Have a long commute or drive often
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Post publicly on social media
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Have a high income or growing net worth
“We live in a sue-crazy nation,” says Hixson. “Even in minor accidents, people are lawyering up with the expectation of lining their pockets.”
And you don’t need millions in the bank to be a target. “If you are responsible for someone else’s injuries and your insurance limits aren’t adequate to cover their expenses,” says Meghan Kelly, VP and wealth insurance advisor at Rockland Trust, “the injured party can still take you to court. The court can force liquidation of assets and future wage garnishment to cover a judgment against you.”
Even a single lawsuit could threaten your savings, your retirement and your peace of mind.
🔍 Learn more: 7 surprising situations your standard car insurance won’t cover (and how to stay protected)
From the experts: Umbrella insurance in the real world
Umbrella coverage might sound theoretical — until it’s not.
One of the more heartbreaking examples I’ve seen is for a homeowner who had an in-ground pool on the property. One of the homeowner’s children had invited some friends over to enjoy the pool. One of the friends jumped into the pool and struck their head on the bottom of the pool, ultimately suffering a brain injury. The homeowner was sued, and they did not end up having to pay anything out of pocket due to the $2 million umbrella policy they had in place.Zachary Patten, president of Oak Grove Insurance in Massachusetts
The risks aren’t limited to pools and parties. Even a basic car accident can have long-term financial fallout.
My sister’s college roommate carried the minimum limits of insurance required in Massachusetts. She rear-ended another vehicle, which was pushed into a third vehicle, and the accident reignited one of the other drivers’ back injury. Not only was she responsible for damages to both vehicles, but she was also responsible for the medical bills, including extensive physical therapy, and lost wages of the injured party. She did not have any assets to liquidate, and she did not carry umbrella coverage. A portion of her wages is still being garnished 15 years later.Meghan Kelly, Insurance Advisor at Rockland Trust in Massachusetts
These are extreme outcomes, but they’re not as rare as people think. Lawsuits over personal injury, property damage or defamation of character can happen quickly, and the average person may not be financially prepared to cover a six-figure judgment on their own.
🔍 Learn more: Do you need full-coverage car insurance? What it is and when it’s necessary
Who umbrella insurance is best for
Umbrella coverage isn’t just for the ultra-wealthy. It’s best for anyone who has something to lose — or a higher risk of being sued.
It may be especially worth considering if you’re:
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A homeowner or landlord. Property ownership increases liability risk, especially if you have renters or host guests regularly.
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A parent of a teen driver. Teen drivers have higher accident rates, and you’re still legally responsible for their actions behind the wheel.
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A high earner or high-net-worth individual. The more you make or own, the more you stand to lose in a lawsuit.
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A frequent host. Backyard BBQs, graduation parties, pool days — they’re fun, but they raise the risk of someone getting hurt on your property.
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A volunteer, coach or board member. Even unpaid roles can open you up to liability.
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An active social media user. Libel, slander and defamation lawsuits can stem from public posts — even ones you didn’t think twice about.
“I offer personal umbrella insurance to nearly every client who owns a home, owns a business or has a high earnings potential,” says Patten. “These are excellent indicators that someone may need a higher limit of liability coverage than their home or auto policies offer.”
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Understanding umbrella insurance coverage
Umbrella insurance covers a wide range of scenarios once your base policy limits are maxed out. It’s designed to protect your finances from large liability claims that go beyond the scope of your home or auto insurance.
Most policies cover:
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Bodily injury liability — for example, if you injure someone in a car accident or they slip and fall on your property
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Property damage liability — like damaging someone else’s home, car or belongings
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Legal fees — including your defense costs, even if you’re not found liable
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Lawsuits related to libel, slander or defamation
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Incidents involving rental properties if someone gets hurt at a property you rent out
“Car accidents would seem the most common cause for being sued and certainly hold the highest risk, as we are operating what can be a dangerous vehicle,” says Hixson. “However, people often look at things in their own home that can lead to injury, like fall hazards and pets.”
How much you need depends on your lifestyle, risk factors and assets. “If someone has a net worth of $1.2 million,” says Patten, “they should have at least $2.4 million in liability coverage. Our rule of thumb is to calculate your net worth and multiply it by two.”
You don’t need to do the math alone. “The best way to determine this is to speak with a financial advisor and your insurance agent to customize what’s best for you and your family,” adds Hixson.
🔍 Learn more: 5 red flags to watch out for when choosing a financial advisor
How to buy umbrella insurance
You can usually buy umbrella insurance through your existing insurer, especially if you already bundle home and auto. Many providers offer a multipolicy discount, which can lower your overall premium.
To qualify, the Insurance Information Institute (III) says you’ll typically need these base liability limits first:
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Auto insurance — $250,000 in liability coverage
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Homeowners insurance — $300,000 in liability coverage
Some insurers may have even higher thresholds, so it’s worth asking up front.
“Umbrella coverage amounts should reflect how much protection you want for your assets — whether that’s $1 million, $2 million or more,” says Chris O’Brien, sales manager at Cornerstone Insurance Agency. “The question I like to ask people is: In the event of a major lawsuit, what portion of your net worth are you willing to self-insure? Most people say, ‘None.’ ”
A financial advisor or insurance agent can help you calculate how much coverage you need based on your net worth, income, exposures and risk tolerance.
“I typically try to determine what their current net worth is, whether they anticipate any changes to it in the near future, and even give them a little buffer room. If they have $1.7 million in assets, for example, we go with a $2 million umbrella to be safe,” says O’Brien.
Alternatives to umbrella insurance
Umbrella insurance isn’t your only option for increasing liability protection, but it’s a cost-effective way to cover a wide range of risks.
That said, if you don’t qualify for a policy or aren’t ready to take the leap, you could explore these alternatives:
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Raise your base liability limits on your auto or homeowners policy. While this won’t protect you from massive lawsuits, it’s a start — and often fairly inexpensive.
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Add endorsements to existing policies. Some insurers offer personal injury or expanded liability riders that can fill small gaps without a full umbrella policy.
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Use legal structures for protection. If you own rental property or a side business, consider forming an LLC to shield your personal assets from liability tied to those ventures.
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Build a legal defense fund. While not insurance, setting aside extra money in a high-yield savings account could help cover legal fees or small claims if needed.
“Most recent high school and college graduates do not need an umbrella policy,” says Patten. “Individuals who do not own real estate, who have minimal retirement savings and who do not have high earnings potential probably do not need an umbrella policy.”
If that’s you, focus on strong core coverage and revisit the idea later as your assets grow.
🔍 Learn more: How to switch your home insurance in 7 simple steps
Other stories in our insurance series
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How to shop for homeowners insurance: A step-by-step guide
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7 hidden home insurance benefits and perks you’re probably not using
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Gap insurance: How it works — and when the coverage is worth the cost
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When’s the best time to shop for car insurance? (Hint: It could be right now)
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What happens if you outlive your term life insurance policy? 4 key options to consider
FAQs: Do you need umbrella insurance?
Not sure how much insurance you need to protect your assets? Start with these common questions. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.
Is umbrella insurance worth it?
Umbrella insurance can be worth it, especially if you own a home, have significant savings or face higher-than-average liability risks. For a relatively small cost per year, umbrella insurance can protect your assets and future income from lawsuits that exceed your base coverage.
Will shopping for insurance quotes hurt my credit score?
No. Insurance companies will conduct a “soft pull” of your credit for quote inquiries, which doesn’t affect your credit score. We break it all down in our guide to the surprising factors that can damage your credit — including what you don’t need to worry about.
How much umbrella insurance do I need?
The smallest umbrella insurance policy is usually $1 million in coverage. Some suggest matching or doubling your net worth — especially if you have a high income, own rental properties or host guests frequently. A financial advisor can help you run the numbers.
What is the 80% coverage requirement in homeowners insurance?
The 80% rule in homeowners insurance refers to a common requirement to insure your home for at least 80% of its replacement cost to receive full coverage for partial losses. If your insurance coverage falls below this threshold, your insurance company may pay only a percentage of your claim, even for partial damage. Learn how to avoid being left underinsured in our guide to the 80% rule for homeowners insurance.
Does umbrella insurance cover legal fees?
Yes. If you’re sued, umbrella insurance typically covers attorney fees and court costs, even if you’re not found liable.
Can umbrella insurance be used for business-related claims?
You could need a separate commercial liability policy to cover business or professional-related claims.
Do I need to have home and auto insurance to get umbrella coverage?
Yes. Most insurers require you to carry both, with high enough liability coverage limits, before they’ll issue an umbrella policy.
Sources
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Should I purchase an umbrella liability policy? Insurance Information Institute. Accessed July 7, 2025.
About the writer
Cassidy Horton is a finance writer who specializes in banking, insurance, lending and paying down debt. Her expertise has been featured in NerdWallet, Forbes, MarketWatch, CNN, USA Today, Money, The Balance and Consumer Affairs, among other top financial publications. Cassidy first became interested in personal finance after paying off $18,000 in debt in 10 months of graduation with an MBA. Today, she’s committed to empowering people to stand up and take charge of their financial futures.
Article edited by Kelly Suzan Waggoner
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