When Do I Need Umbrella Insurance?

Matt wants to know at what net worth he should consider umbrella insurance. Dave explains.

QUESTION: Matt on Twitter wants to know at what net worth he should consider umbrella insurance. Dave explains.

ANSWER: Probably $500,000 net worth or greater. Let me help you understand what net worth means because even the politicians don’t know what it means, apparently. Your net worth is what you own minus what you owe. If you have a $600,000 house that you owe $625,000 on, that is a negative $25,000 toward your net worth. It’s not your asset base; it’s your net worth and net of debt is what it amounts to.

A millionaire is not someone who makes $1 million a year. That is not the definition of a millionaire—not by anybody’s definition except politicians who are twisting things and throwing phrases out there. A millionaire is someone whose assets minus their liabilities—what you own minus what you owe—are $1 million. If you own a $1 million paid-for home and have no other money, you’re a millionaire by definition. That is the definition of a millionaire. A billionaire would be the same thing. What you own minus what you owe—that determines your net worth. It is not your income. There are a lot of millionaires who do not make an income of $1 million a year.

I would get umbrella insurance, which is extra liability insurance, when you reach about a $500,000 net worth. Prior to that, I would carry a $500,000 of liability, which you’ll be carrying for the rest of your life anyway, on your homeowner’s and on your car insurance and any other policies that you buy that have liability attached to them. But once you get above that, you can pick up another $1 million in liability insurance called an umbrella policy that attaches to the top of that and covers everything for an additional $1 million for about $200 a year in most states. It’s a great buy.