If you're the type of person who believes in hoping for the best yet preparing for the worst, you may want to consider adding an umbrella policy to your current home and car insurance. The purpose of umbrella liability insurance is to protect your assets when your liability insurance doesn't cover all the damages caused by an accident.

For example, if you were responsible for a multiple vehicle car accident on the freeway, the damages may exceed your policy's coverage limits even if you've opted for coverage that is over the legal minimum car insurance liability requirement for your state. Without umbrella insurance, you'd be left with a bill for the remaining auto accident expenses.

Who Is Covered by an Umbrella Policy?

Typically, umbrella liability insurance will cover damages caused by you and your dependents that exceed the limits of your car insurance or homeowners insurance. Some policies will also cover damages caused by animals, which could be a helpful addition to your home insurance if you happen to have several pets.

However, it is a good idea to keep in mind that umbrella policies do not normally cover requests for punitive damages or claims resulting out of any home-based business that you may run. Read the exclusions in your policy carefully to make sure you understand exactly what type of coverage you are purchasing.

Buying Umbrella Liability Insurance

At one point, most people considered umbrella liability insurance to be something that was only necessary if you had a very high income and significant assets that would be at risk in a lawsuit.

However, since our society has become more litigious in recent years, even people of relatively modest means can benefit from this extra protection. With juries regularly awarding million dollar settlements, umbrella policies can provide a great peace of mind.

Because an umbrella policy only kicks in after your regular coverage has been exhausted, this type of insurance is fairly inexpensive to purchase. You can often purchase $1 million of coverage for just $200 to $300 per year.

However, an insurance company will often require that you purchase both your homeowners insurance and auto insurance through them before you are allowed to buy an umbrella policy. Contact your insurance agent for details.