Perhaps you've loaded up on insurance: High limits on car insurance, home and flood insurance, and ample life insurance. But even these coverages can't account for every disaster in life. To further protect your assets, there's umbrella insurance. Umbrella insurance kicks in when the limits of your auto or home insurance have been exhausted and there are still damages to pay. How could that happen? Say, for example, someone falls on your sidewalk and sues you for an ungodly amount. Or say you cause a six-car pile-up on the highway.

Umbrella policies provide an extra cushion of insurance protection.

How it works

Umbrella policies provide an extra cushion of insurance protection.

Umbrella policies cover damage claims that you, your dependents or even your pets may cause. They start paying out after the liability insurance in your homeowners and auto policy runs out. For example, if you have a home insurance policy with liability coverage of $300,000, the umbrella policy will pay claims above $300,000, up to the limit you select, such as $1 million. Or if your liability limit on your car insurance policy is $250,000 of bodily injury protection per person and $500,000 per accident, your umbrella coverage kicks in after you exhaust that coverage.

Because the majority of claim risk is paid by your primary auto or home policies, personal liability umbrellas are relatively inexpensive. According to the Insurance Information Institute, you can buy a $1 million umbrella policy for about $150 to $300 a year. The next million will cost about $75, and about $50 for every million after that.

Many insurance companies require that you purchase both your auto and home insurance coverage through them in order to buy an umbrella policy, too. Further, your insurer may require you to buy auto or home liability limits at a minimum amount, such as $300,000.

More than your average liability coverage

When you buy a personal liability umbrella policy, you're getting more than just higher liability limits. You're also buying broader coverage in case you're sued. The umbrella policy covers you if you cause bodily injury, property damage or personal injury. Some umbrella policies also cover you if you face liability due to your service on the board of a civic, charitable or religious organization.

Umbrella policies won't cover intentional acts.

But just as with any insurance policy, don't look to your umbrella policy to cover your intentional acts that cause damage. Nor will it pay for punitive damages in judgments against you. Umbrella policies also do not cover damages from any businesses you run; for that, you need a business insurance policy. Check your umbrella policy for specific exclusions.

Before buying an umbrella policy, ask your insurance company about the cost to raise the liability limits in your current auto and home policies. You may even consider offsetting the premium increase for that by raising your deductibles.

At any rate, in a litigious society it's smart to protect your assets.