The term umbrella is used because it covers liability claims from all policies underneath it, such as auto and homeowner policies.
The question is: Do you need an umbrella?
Recent stories in the New York Times show how an umbrella policy would work. Say you crash into a Mercedes with a highly paid executive at the wheel. He is injured so badly, he cannot return to work. A jury awards him millions of dollars, and you have to pay it. The court takes your savings, your home, all other assets, and requires you to pay part of your salary for decades.
People who have an umbrella policy would be covered for the damages. It protects their net worth over and above what other insurance does. And it pays legal costs for defending yourself against a law suit.
For people who have any sort of assets, like a home with a large amount of equity, umbrella insurance can be a key part of financial protection. But not many people carry it.
State Farm, the biggest home insurer in the country, says only about 12 percent of its policy holders buy umbrella coverage.
State Farm charges about $160 a year for a million dollars in coverage.