This is Part 3 of our series on what you need to know about your insurance. We previously wrote about home and auto.

Umbrella Liability Insurance

If you have a high net worth – or even a modest net worth – you almost surely need umbrella liability insurance.

That's because the cap on liability coverage on auto insurance is often, at most, $500,000. If you have significant assets in your bank or brokerage account and you are at fault in a very serious car accident, those assets are at risk. The best way to protect yourself is umbrella liability insurance. It adds protection on top of your auto coverage and on top of your home insurance policy, where you also have liability but where the risks are admittedly lower.

Below are facts worth understanding about umbrella policies.

What you have to lose: If a plaintiff successfully sues you, the only protected assets you have are your retirement accounts and some of the equity in your home, with the protected amount varying by state. The assets easiest for the plaintiff to claim include bank account(s), brokerage accounts(s), and the value of a second home. If you have a significant unprotected net worth, you need an umbrella.

What else you have to lose:

• There are examples of plaintiffs garnishing future wages – which means if your assets or insurance don't cover the award, a judge may award them a portion of your future income. This is most common when that income stream is high and predictable (think, doctors).
• Private investments, including ownership of your business.

How wealthy do you need to be to buy an umbrella? There is no right answer, but many people should have the minimum umbrella: $1 mm. Here's why. Let's say you have auto liability coverage of $250,000, and you have $750,000 in your unprotected bank and brokerage accounts. If you also had a $1 mm umbrella, your total protection would be $1 mm + $250,000 = $1.25 mm. The plaintiff's award would have to be over $1.25 mm before any of your unprotected assets were at risk. Hopefully, you could settle a lawsuit for that amount. But with $750,000 unprotected and no umbrella, it's much easier to imagine an award over the $250,000 coverage you have – and then you will owe money.

How much umbrella coverage is too much? Again, no right answer. A rule of thumb is to have as much coverage as your unprotected net worth. But the right coverage, in part, is the amount that will help you sleep at night. Our highest net worth clients tend to have $10 mm policies because a successful claim over that amount is incredibly rare. Many of our clients have $2 mm - $5 mm.

Umbrella policies are inexpensive. We often see annual premiums of $200 or less for each $1 mm of coverage. That's because the likelihood of a claim is very low. But if you do have a claim, umbrella insurance is incredibly valuable.

When you most need umbrella coverage.

• A very high net worth individual, especially if the other side could easily deduce that they have a high net worth.
• Parents of a teenage driver, especially a male. Sorry, that's just the odds.
• An aging driver. Sorry, that's just biology.

Business liability is excluded. An umbrella is also known as a PUP (personal umbrella policy). It provides no protection for liability related to your business – even if you run your business from your home. You need separate coverage. If you rent out a second home, sometimes the insurer will combine the two into one policy – but they are essentially two separate liability policies.

Reasons to buy umbrella coverage from the same insurer who provides your home and auto coverage. Over the years, we have discovered several cases where a different insurer covered a car or second home, the primary insurer did not know, and the umbrella did not cover those underlying risks. If everything is with one company, you still need to check that the umbrella covers all the risks – but the insurer will almost surely do that. If your assets are spread out, you have more coordination to do, and there's a greater risk of missing something.