When do you need an umbrella policy?

An umbrella policy is intended to provide supplemental insurance coverage in the case of a liability. While claims are most often made against umbrella policies after automobile accidents resulting in the death of another individual, any liability -- including death, injury, uninsured motorist, libel or slander -- would be covered.

Companies that sell auto and homeowners insurance usually sell umbrella policies, which are usually offered in $1 million increments, at an annual cost of $150 -- $250 per $1 million in coverage. Generally, the insurance company will require you to hold either its homeowners or auto policy before offering you an umbrella policy; this helps in the delegation of benefits.

Anyone can benefit from an umbrella policy -- especially someone who is likely to be quoted in a newspaper, a magazine, or through another media. Here's an example:

Let's say that you are sued for slander, and the plaintiff is asking for $1.5 million in damages. You have $500,000 in homeowners insurance with Company A, in addition to $1 million in umbrella coverage. That coverage would protect you if you lost the case, and Company A would absorb the cost of your defense because it is in their best interest if you are found innocent.

DAVID FLORIAN is an established member of the American Academy of Actuaries with more than 10 years of actuarial experience. Florian is a registered Series 7 and Series 63 insurance representative licensed in life, health, annuity, auto and personal lines in 51 jurisdictions.