An umbrella policy provides additional coverage or “excess liability” above the limits of your basic policies. It can protect you from bodily injury liability claims and property damage liability claims. Umbrella policies also provide a broader form of coverage and can help cover legal fees, false arrest, libel, and slander.

Your umbrella insurance can come into play if you are found liable and need to pay damages, or if you are sued and need to pay for your legal defense – even if the result is that you are not found to be responsible. An umbrella policy only pays once your basic liability limits have been exhausted or the claim is excluded from the basic liability coverage. 

The claim will be made against you, the policyholder, on behalf of the wronged party. Then your insurance company may pay the settlement amount up to the limits of your coverage. If the settlement amount exceeds your coverage limits, you are responsible for paying the remaining amount out of pocket.

Your car, house, investments and retirement accounts, as well as your normal checking and savings accounts and even future income, are all considered assets. It is important to know that if you are sued for a lot of money and do not have enough liability insurance or an umbrella policy to cover those costs, all of your assets are exposed. 

People typically choose to buy an umbrella policy because they want to prevent the possibility of financial ruin due to one misstep or unforeseen accident. Umbrella insurance can provide the protection to prevent such an outcome.

When choosing your coverage limits, consider three things:

1. The risks you may face. Consider risks as a homeowner or renter, the risk of causing an accident during your work commute, and any potentially dangerous activities you participate in that could put those around you at risk.
2. The value of your assets. These include properties, possessions, stocks, bonds, savings and retirement funds. The more assets you have to protect, the higher the umbrella policy limit you should consider.
3. The potential loss of future income. Because liability lawsuits can result in loss of both current assets and future income, even those with few assets to protect may want to consider the long-term ramifications of a serious claim.

When you review your future income, consider your earning potential. You do not have many assets now, but if you’re on track for a high paying career, you could be involved in a lawsuit that can target money you haven’t earned yet.