Insurance is supposed to be an invaluable tool in financial planning, watching your back against the many whims of life that can sometimes be pretty capricious. Of course, there come those times when not even your general auto, home, or renters’ insurance can quite cover that meaningful claim or lawsuit. It’s then that umbrella insurance steps in. This oft-overlooked type of coverage affords protection in safeguarding one’s assets and financial well-being if things get hairy.

The concept of umbrella insurance, how this type of insurance works, and when it is necessary to protect you and your family that little bit better is explained below.

1. What Is Umbrella Insurance?
Umbrella insurance is a kind of personal liability insurance that extends the amount of coverage beyond the limits of currently held policies, be they home, auto, or renters insurance. Put differently, this may be envisioned as additional protection applied in cases where liabilities extend beyond the limits of the other policies.

• Liability Protection: In essence, an umbrella insurance policy protects you against damages or personal injuries to others for which you are held liable. It includes protection against bodily injuries, damage to property, and even slander and defamation.
• Extended Coverage: Umbrella insurance covers when standard liability policies have reached their coverage limit. For instance, if one gets involved in an automobile accident and the damages exceed the capacity your auto insurance can pay, then your umbrella kicks in to pay the rest. Otherwise, in case of any accidents on your property that took you to the courts, umbrella insurance would also extend the coverage in case of your homeowner’s insurance limit being exceeded by lawyers’ fees and settlement costs.
• Global Protection: One of the distinctive features of umbrella insurance is that it does cover, sometimes globally. Whether you are going abroad or dealing with an accident or incident which took place outside your home country, your umbrella policy might protect you.

2. How Does Umbrella Insurance Work?
How Umbrella Insurance Works: It works on a secondary basis, taking over directly when the primary coverage-insurance related to auto, home, or renters-reaches a limit. These policies protect you against liability claims that may be so huge that they would wipe out your savings or make you liquidate your properties to meet the costs incurred.

Here is how this kind of insurance works:

Scenario 1: Car Accident Liability
Suppose you are in a very serious car accident and it was fully your fault. The other driver has serious injuries, and the total of medical bills plus other associated costs amount to $1 million. You do happen to have an auto insurance liability limit of $300,000. That would be the instance where you would need to pay $700,000 out-of-pocket. Insurance like that would kick in once your auto policy’s limit was tapped out, saving you from financial ruin.

Scenario 2: Injury on Your Property
Now, imagine that a guest fell at your place-say he fell down and bumped his head against the floor-and seriously injured himself; he is now suing you for $800,000. Your homeowners policy has a liability limit of $500,000. In such instances, if you do not happen to possess an umbrella insurance policy, by rule of thumb, you would be expected to pay that remainder of $300,000 yourself, out-of-pocket. In the case of an umbrella, though, it would cover that remainder.

Legal Defense Coverage: This is arguably, aside from settlements or judgments against you, one of the most important things covered under an umbrella insurance policy-the cost for legal defense. Even when a person does not bear any fault, these costs can be outrageously expensive.

3. What Does Umbrella Insurance Cover?
Umbrella insurance covers a wide area and, therefore, can protect you from a wide range of scenarios. Certain common scenarios where it may give you vital protection include:

• Bodily Injury Liability: This is an umbrella insurance policy that may cover medical expenses related to the injury, lost wages, and other related damages in case your actions result in bodily injury to another human being.
• Property Damage Liability: This is one’s being liable for any damages caused to other people’s properties. For example, an automobile accident, or if a tree falls off your yard and falls onto your neighbor’s house, the umbrella covers repair or replacement costs that exceed basic policy limits.
• Personal Injury Liability: The umbrella insurance covers claims for personal injury arising out of defamation, libel, or slander. For instance, it could be a case whereby someone takes you to court over something which you have put online or said, and what was said was defamatory; in such a scenario, the umbrella insurance pays your legal fees and settlement costs.
• Liability for Rentals: As a landlord, umbrella insurance extends the liability arising from tenants. In that case, if one of your tenants has an injury on your property due to its unsafe conditions, umbrella insurance will cover the excess over and above your landlord insurance.
• Defamation of Character, Slander, or Libel: Some policies of the umbrella pay for damages due to false arrest, imprisonment, or malicious prosecution.

Not all things, however, fall under umbrella insurance. Ordinarily, umbrella insurance does not cover your own injuries, damages to your personal properties, or damages from an intentional or criminal act.

4. Who Needs Umbrella Insurance?
Not everyone needs an umbrella insurance policy, but to some individuals and families, the extra protection that comes with umbrella insurance is priceless. Instances you may want to consider getting an umbrella insurance policy include:

• You have Substantial Assets to Protect:
  If you have built up some impressive assets such as a home, savings, investments, or any other property worth quite a lot, umbrella insurance should be taken out on it to protect it against a large liability claim or lawsuit. Otherwise, in case this happens, you might have to liquidate your assets to cover damages that exceed the limits of your ordinary insurance.
• You Rent out or Own Property that You Lease to Tenants:
  Owning rental property can raise your liability-especially when an injury happens to tenants or a visitor while on your premises. An umbrella insurance policy provides additional coverage that can help protect your personal assets from a lawsuit.
• You’re a High-Value Target:
  The richest among us often is usually the most attractive target, due to deep pockets. This appeals to a number of lawsuits against rich people. Umbrella insurance will give an individual peace of mind, with the added protection against large claims that may jeopardize hard-earned assets.
• You Engage in High-Risk Activities:
  When the premises involve high-risk activities, such as skiing or boating, even large parties need umbrella insurance for good protection. This increases the risk factor associated with being in an accident and a possible lawsuit.
• You Are a Public Figure or Business Owner:
  One can readily understand that allegations of defamation, libel, and slander are common against public figures and business owners. Umbrella insurance would cover you against such accusations and all the legal and financial repercussions arising out of it.
• You Have Teenage Drivers in the Family:
  Since, statistically, more accidents involve teenagers and large claims ensue, umbrella insurance will provide additional security in the case that your family is involved in one.

5. How Much Umbrella Insurance Do You Need?
How much umbrella insurance you might need is directly related to your personal financial situation and risk. That is, the larger your assets, the greater your liability may be, requiring you to purchase additional umbrella coverage so that those assets are protected in case of a lawsuit or a large liability claim. Take an inventory of your assets. Estimate the value of your home, savings, investments, retirement accounts, and other valuables. That gives you an idea of what you could lose in a lawsuit.

Consider your risks again; consider your lifestyle and activities and think about how much liability protection you will need. If you have businesses, rental properties, or hobbies that could pose a greater risk for liability claims, you will want to select higher limits of coverage. These policies generally start at $1 million in coverage, but you can increase the amount of coverage if you find it necessary to do so. In fact, under some insurers, the cover may go up to as much as $10 million or even more under a policy.