Assume your son's friend falls on your pool deck and is seriously injured. His family gets hit with a lot of hospital bills and related medical expenses. They sue you for the bills and punitive damages. Your homeowner's insurance may cover some of your liability, but your legal fees and judgment could far exceed normal home liability limits. This is where a personal umbrella insurance policy comes into play. Think of it as an extra bit of coverage when unexpected trouble literally rains down on you.
If someone is injured severely on your property, a typical homeowners' liability policy only covers you for around $300,000 to $500,000. If you're driving and cause a crash that injures another driver or passenger, the expenses may fly well above what your auto liability insurance covers. An umbrella insurance policy acts as additional liability coverage, and in most cases will cover what your regular auto insurance will not. This is why it's also known as excess liability insurance.
A major reason to get an umbrella insurance is to protect your assets. Thus, the more assets you have, the more you need it. If you are at fault in an accident and are forced to pay $300,000 in damages, but your home insurance only covers $200,000, your umbrella policy picks up the difference. Without this insurance, the courts could try to collect the damages out of your personal property and assets.
The idea of paying for another insurance policy probably doesn't excite you, but at least you won't pay a lot for umbrella coverage. For example, in 2012, you could get a $1 million liability plan from Met Life for around $200 per year. Many insurers offer personal liability policies with coverage up to $5 million, or even more in some states. Given this extremely low cost, it's hard to skip having the extra protection if you face a lot of risks and have a lot of stuff you don't want to lose.
Peace of Mind
Like any insurance, an umbrella policy should bring you some peace of mind. With any luck, you'll never have a circumstance where you need to use the coverage. But bad things do happen, and just knowing it's there is one way of knowing you're prepared to deal with a tragedy or accident beyond your control -- at least from a financial aspect.
Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.