What is an umbrella policy? How much coverage do I need?

When you buy a house or a car, you may decide to purchase the minimum required insurance coverage. Such coverage may be sufficient after a minor fender-bender or if your roof is damaged by hail.

However, what if something catastrophic happens? If a child is seriously injured at your house, or you cause a car accident that harms – or even kills – several people, you could be sued for damages.

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In such cases, basic liability coverage in your home and auto insurance policies may not cover the full amount of a large settlement. Suddenly, every asset you have could be at risk. A court's decision could take away your current savings, a portion of your future wages and even your house itself.

When you have assets you can't afford to lose, consider an umbrella liability policy. Umbrella insurance provides extra coverage over and above your existing liability limits and pays out once your main liability coverage has been exhausted.

How much does umbrella insurance cost?

Typically, you'll pay around $150 to $300 annually for $1 million in umbrella coverage, according to the Insurance Information Institute (III). While $1 million is the standard minimum for an umbrella policy, you also can opt for larger amounts of coverage in million-dollar increments.

To be eligible for umbrella coverage, you'll also need to meet minimum coverage requirements on your other policies – typically, $250,000 of auto liability coverage and $300,000 on your home insurance policy, according to III.

You may not need umbrella insurance if you have no assets worth taking or you have enough savings to replace the coverage amount. For everyone else, however, an umbrella policy can provide an extra layer of protection against the worst-case scenario.

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