Do you need one?
People buy insurance policies to protect themselves and their families from unexpected events that could end up costing them a significant amount of money. Homeowner and auto insurance are two types of insurance policies that help to reduce the risk of financial liability. However, what many people do not realize is that most insurance policies do not cover the entire financial risk. This creates a coverage gap.
An umbrella insurance policy covers liability that go beyond the limits of your homeowners, auto, renters, watercraft or motorcycle and/or other personal policies.
Your homeowners, auto, and other personal insurance policies have limits; a maximum they will pay on a single incident. If you are sued or a claim is settled against you for more than the maximum the insurance company allows, you are personally responsible for the rest.
An umbrella policy is only used if you exceed the liability limits of coverage under your other personal insurance policies, so the premiums are usually very affordable.
An umbrella policy helps protect your assets from being seized or attached in the event you are held liable for paying a claim or lawsuit that it exceeds the limits of your other insurance policies; a policy like this can also prevent a judgment against you that can eventually lead to a lien on your house or business.
Umbrella insurance policies typically offer coverage limits starting at $1 million; some police limits can be up to $5 million. You can enlist the advice of your insurance agent to help you decide if an umbrella policy would be appropriate for your financial situation.
Sources: New York Times, Smart Money