Live in California? Do you wonder “how much personal liability umbrella insurance should I have?”
In this article, I cover the basics of personal liability umbrella insurance and then discuss five principles I believe to be most relevant in deciding how much personal liability umbrella insurance California residents should have.
Insurance for Personal Liabilities
Living our lives generates the possibility of liabilities to others. Accidents happen. It’s part of the human experience.
Most Californians have two primary insurances to guard against personal liability to others.
The first is homeowners insurance. For those who rent, this is renter’s insurance. This insurance can cover things like slip-and-fall accidents inside one’s home or one’s stoop.
The second is auto insurance, specifically liability insurance to third parties.
Often homeowners and auto insurance have limits on the amount of liabilities it will pay to third parties. These could be $300,000 or $500,000 per accident, for example.
In today’s environment, particularly in California, it is very possible that our liabilities to third parties through auto accidents or in-home accidents can exceed these liability caps. Thus, many can and should obtain additional insurance coverage in the form of personal liability umbrella insurance, often referred to as “umbrella insurance.”
Personal Liability Umbrella Insurance
An umbrella policy sits on top of, not “instead of” or “in addition to” primary insurance. Umbrella insurance is generally secondary coverage.
Here is an example of how that works in practice. Oscar has a car and has a $500,000 auto insurance liability policy. Further, Oscar has a $2 million personal liability umbrella policy. Dollars $1 through $500,000 of Oscar’s potential auto liability to third parties would be paid out by the auto policy. Dollars $500,001 through $2 million of liability would be paid out by the umbrella policy
It is not the case that Oscar now has $2.5 million worth of auto liability coverage. Oscar’s $2 million umbrella is not added to his primary auto insurance coverage. Rather, the umbrella fills in coverage up to its limit, in this case $2 million.
You can see that with respect to Oscar, the most likely insurance to pay out is his auto insurance. Say Oscar rear-ends another car and causes $25,000 worth of damage. His auto insurance policy would pay out $25,000 and his umbrella policy would pay $0.
Since umbrella insurance is generally a secondary policy, it tends to be somewhat affordable. That said, in California my experience has been that even umbrella insurance premiums are rising fast as of 2026.
Oftentimes it is logical to bundle home, auto, and umbrella. Carriers often give discounts when consumers bundle.
Umbrella carriers generally require minimum levels for home and auto protection. They don’t want consumers using an umbrella policy as a backdoor home and/or auto policy, so it is quite common for an umbrella carrier to require certain minimum coverage amounts with respect to home and auto policies.
Umbrella insurance is generally offered in million dollar increments. In most cases, insurance companies will issue up to $5 million of umbrella insurance as long as the insured (a) has sufficient minimum home and auto coverage and (b) can write the check. Beyond $5 million generally requires additional underwriting.
Protected Assets and Umbrella Insurance
In theory, if all of one’s wealth was in protected assets in certain states, there’s not much need for any umbrella coverage. The person could be sued, but if every significant asset was protected, at least in theory there would be little to nothing to collect in litigation.
Depending on the state, creditor protected assets often include 401(k) and other ERISA protected retirement accounts. States also offer varying degrees of protection for one’s primary residence. In Florida, the entirety of one’s primary residence value is a protected asset.
Retirement account protection depends on both federal and state law.
IRAs have been subject to relatively weak California law creditor protection, though they do qualify for decent federal protection in bankruptcy. A relatively new California law, AB 2837, has placed distributions from 401(k)s and other ERISA protected accounts at some risk. It remains to be seen how courts implement new AB 2837.
Ultimately, the amount of retirement account wealth that will be protected in litigation in California is subjective and dependent on all the facts and circumstances, including whether bankruptcy has been declared. Limited retirement account protection is a risk of living in California.
The amounts protected by California’s homestead exemption vary by county and may not fully cover the value of one’s primary residence.
For Californians, residents of what is generally perceived as a litigious state, the question arises, how much umbrella insurance coverage should I have?
California Umbrella Insurance Principles
I don’t have the silver bullet formula for exactly how much personal liability umbrella insurance you or anyone else should have.
But I have some principles that I believe can be helpful in making that determination. Of course, these five principles are not the only potential considerations one has when determining umbrella insurance coverage level. But I do believe they can be helpful for many Californians.
The Most Important Million is the First Million
In my opinion, the most important million in umbrella coverage is the first million.
Why?
First, a $1 million personal liability umbrella insurance policy covers a significant swath of the liability probability curve.
Generally speaking, the liability probability curve is at its highest at lower levels of monetary liability and slopes down. The greater the amount of monetary liability, the lower the likelihood of incurring it.
Further, consider the practicalities of settlements, as discussed in the second principle. The potential to settle a liability claim at $1 million is very valuable.
Second, it is helpful to have a deep pocket in one’s corner if one has a liability event. The umbrella insurance company is on the hook for a significant amount of money if the insured has a liability event (such as a car accident) and thus has incentive to work through their legal team to limit the ultimate settlement amount. Obviously this is beneficial to the insured.
I look at umbrella insurance coverage level like an elementary school spelling test. When I went to Catholic elementary school, in second grade we had 20 word spelling tests on Friday mornings. Each word was worth 5 points.
For many Californians, having no personal liability umbrella insurance is like getting a 0 on the spelling test, while having $1 million of personal liability umbrella insurance is like getting a 100 on the spelling test.
For some more well-to-do Californians, the $1 million umbrella policy is like getting an 80, 85 or 90 on the spelling test. Increasing umbrella coverage to $2 million, $3 million, $4 million, or $5 million (depending on the circumstances) would get these well-to-do Californians to a 100 score on the test.
Consider Potential Exposure
Perhaps the most important question to ask is “how much could someone sue me for?”
In this regard, Dr. Jim Dahle, known online as The White Coat Investor, makes a very helpful assertion: most people are very willing to walk away for a $1 million settlement. Thus, Dr. Dahle argues that for most people a $1 million personal liability umbrella insurance policy can be sufficient.
For this reason I believe even the extremely wealthy rarely need more than $5 million worth of personal liability umbrella insurance, even in a litigious state like California.
One can never precisely predict the ultimate outcome of a future dispute. But settlement practicalities, including both sides’ desire to avoid a lengthy and costly legal process, do help define, to a certain degree, potential exposure.
Consider Unprotected Assets
I believe Californians should look at things like taxable accounts, HSAs, high housing values, rental real estate, etc. and consider protecting them with umbrella insurance. As discussed above, the extent to which retirement accounts are protected will depend on various facts and circumstances, including but not limited to whether bankruptcy has been declared.
The extent to which Californians should protect retirement accounts with umbrella insurance is highly subjective and should be considered, in today’s environment, very much in conjunction with the other principles mentioned here.
If In Doubt, Round Up in California
California is a challenging environment when it comes to cost of living, asset protection, litigation, and the like. No one precisely knows exactly how much personal liability umbrella insurance is optimal. Why not round up, not down, on umbrella insurance coverage level if in any doubt?
Frequently Revisit Umbrella Insurance Coverage Levels
I believe Californians should frequently revisit coverage levels. People’s circumstances change. California law changes. The frequently evolving landscape both legally and personally strongly suggests Californians should frequently revisit umbrella insurance coverage levels.
Consider Driving Less
Risk mitigation is certainly not limited to personal liability umbrella insurance.
What’s the highest risk personal activity most Californians engage in? It’s easily driving.
Living in California usually requires time behind the wheel. But is every last mile behind the wheel necessary?
A personal anecdote: This Fall I am speaking and attending a three day financial planner conference in San Diego. My original plan was to drive down from Los Angeles. The problem with that plan is it required 150 miles each way fighting Southern California traffic. That’s 300 miles for me to get into an accident, only to have my car sit in a hotel garage for three days incurring parking fees.
So I chose a different path: I’m taking the Amtrak Pacific Surfliner to and from the conference. I even upgraded (for just $20 each way) to Business Class. Instead of fighting traffic and risking an accident, I’m relaxing in Business Class drinking free coffee, catching up on work and/or listening to the Hindley Street Country Club.
Consideration should be given to taking an Uber or Lyft to the airport instead of driving and parking there. There are marginal tactics like these available that can reduce the miles we drive.
Conclusion
Asset protection is a significant financial planning consideration in California. Personal liability umbrella insurance is one of the best available tools to provide financial protection in the event of an accident. Californians often benefit from having personal liability umbrella insurance. There’s no precise science for determining exactly how much coverage to have. But I hope the five principles I provided in this article are helpful as Californians consider the appropriate level of coverage they should have.
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This post is for entertainment and educational purposes only. It does not constitute accounting, financial, investment, legal, or tax advice. Please consult with your advisor(s) regarding your personal accounting, financial, investment, legal, and tax matters. Please also refer to the Disclaimer & Warning section found here.