An umbrella policy, often referred to as excess liability coverage, kicks in when the underlying limits on your homeowner’s or auto insurance policies have been exhausted, or if you are sued personally for something that neither your homeowner’s nor your auto insurance covers.

Depending on the insurance company, you can purchase anywhere from $1 million to sometimes as high as $10 million worth of excess coverage. The amount of coverage you select should depend on how much you are “worth.” If you have $5 million worth of personal assets, you should get at least a $5 million umbrella policy. Because the coverage is rather inexpensive to purchase, it is not uncommon for someone to buy a $5 million or $10 million umbrella policy, even if that number far exceeds their net worth.

Most insurance companies will not offer you umbrella coverage unless you already have both your homeowner’s and auto insurance policies with them. Additionally, the insurer will most likely require that you maintain a certain level of liability on those policies in order to qualify for the excess policy. Usually, you must maintain at least $250,000 of bodily injury liability per person, $500,000 per accident, $100,000 for property damage for your vehicles, and $500,000 of liability for your home.

The good news is that coverage is cheap. It is possible to obtain $1 million worth of excess liability for about $150 to $300 per year. The more cars and homes you have, the higher the premium, but the cost is still low. In addition to your home and cars, liability associated with any other conveyances you may have, such as boats, motorcycles, and other recreational vehicles, may also qualify for coverage under the umbrella, depending on the insurance company.

You may wonder when to use the umbrella coverage. For example, if you are involved in a car accident where you hit a pedestrian, resulting in medical expenses that cost more than what your auto policy covered, the umbrella policy would kick in. Or if the pedestrian decided to sue you for negligence and punitive damages, your umbrella could be used to cover your legal expenses and to pay any judgments levied against you.

Excess liability also covers you for all sorts of things that have nothing to do with your cars or homes. For example, coverage includes personal injury protection, which includes false arrest and imprisonment, malicious prosecution, defamation, invasion of privacy, wrongful entry, or eviction.

Regardless of your potential use, the relatively low cost makes an umbrella policy a wise choice when you are evaluating and updating your insurance needs.

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