Here's When Dave Ramsey Recommends Umbrella Insurance

When does Ramsey believe this coverage becomes essential?

There are many different kinds of insurance policies individuals can purchase to protect their assets. An umbrella policy is one of the most important types of insurance, but is often overlooked.

An umbrella insurance policy provides additional liability coverage in case other insurance policy limits are hit. For example, if a home or auto policy covers $200,000 in injury damages and a victim who is hurt successfully makes a claim for $500,000 in damages, an umbrella policy would pay out the remaining $300,000 the insured was responsible for.

Umbrella policies provide vital asset protection, but are they a good idea for everyone to purchase? Personal finance guru Dave Ramsey doesn't believe so. Instead, he suggests buying an umbrella insurance policy only after meeting this specific milestone. But, is he right?

Dave Ramsey said you need to buy umbrella insurance in this situation

In Dave Ramsey's Guide to Investing, the financial expert offers insight into when consumers should purchase liability umbrella insurance. Ramsey says that people should purchase this type of coverage once they have a net worth of $500,000. He believes getting covered at that point is important because the extra coverage will protect the wealth that they are building.

Ramsey points out that umbrella insurance policies provide generous protection at an affordable price, with most policies offering $1 million in extra coverage for less than $300 in annual premiums. And, he's absolutely correct that buying this extra coverage can be much more affordable than adding additional liability insurance to car or home insurance policies.

The problem, however, is that it can take a very long time to get to a net worth of $500,000 for most people. And, during this entire time as individuals are working towards amassing half-a-million dollars in wealth, their current assets and their future income is at risk.

See, if an individual doesn't have an umbrella policy, there's a very real chance that an insurance claim could be made against them that exceeds the coverage limit on their home or auto policies. That's especially true if they have minimum required coverage, which usually provides only around $25,000 per person and $50,000 per accident in liability coverage or less for auto insurance.

If a claim is made against them that exceeds the amount of their auto or home insurance, they could be held personally responsible for the additional losses. And, even someone with less than $500,000 in assets could still lose a lot if someone makes a claim against them that exceeds their policy limits.

After all, if a consumer works hard to pay down his house and acquire investments and ends up being held personally responsible for $250,000 in extra damages above what insurance covers, this would still mean taking a huge financial hit.

The reality is, almost anyone who has a positive net worth -- or who is currently making a high income or expects to make one in the future -- should consider umbrella insurance. The protection it provides is affordable, and it can protect against wage garnishment or loss of the assets that the policyholder has worked for. It's likely well worth it.

Want another Dave Ramsey recommendation? Check out The Ascent's Churchill Mortgage Review.