- Auto insurance: A man is late for work and speeding on the highway. He loses control on icy pavement and strikes another car in the driver's side. The other driver suffers serious injuries; hospitalization, follow-up care, medicine, rehabilitation and pain and suffering tally up to $900,000. The at-fault driver has an auto insurance policy that covers $250,000 for injuries to any one person. If he has an umbrella with a $1,000,000 limit, it will pay the remaining $650,000.
- Bonus auto insurance scenario, based on a true story: The policyholder's son loses control on a highway overpass. His car plunges off the overpass and lands on a row of vehicles for sale in a Lexus dealer's lot. Six vehicles are damaged to the tune of $150,000. His father's auto insurance covers $100,000 in property damage from any one accident. If he has an umbrella, it will pay the remaining $50,000.
- Homeowners insurance: A homeowner has insurance that covers her liability for bodily injuries to others, up to $300,000 per accident. A neighbor who has three children under age 10 drowns in her swimming pool. His estate sues her for $1,500,000. Her homeowner's insurance will pay all of its $300,000; if she doesn't have an umbrella, she is responsible for the remaining $1,200,000.
- Boats: A man has a boat insurance policy that covers his liability for injuries to others up to $300,000 and an umbrella policy with a $2,000,000 limit. He loans his boat to a friend for the weekend. The friend takes it out on a lake with three buddies and a case of beer. He becomes intoxicated and plows into another boat late at night. The survivors and the estates of the deceased sue the driver and the boat owner. The court finds the owner 20 percent liable for the $5,000,000 judgment. His boat policy pays $300,000 and his umbrella pays $700,000.
- All-terrain vehicles: A man's grandson from out of state visits him for the holidays. He takes the boy out for a spin on the ATV he bought the week before, but the boy bounces off and suffers critical injuries. The man bought coverage for the ATV under his auto policy, but the most it will pay is $100,000. The boy's medical care will cost $750,000; his grandfather's umbrella policy will pay $650,000.
- Personal injury: A woman loudly repeats a rumor she heard about one of her neighbors. The neighbor sues her for defamation of character and wins $500,000. The woman's homeowner's insurance does not cover defamation, but her $1,000,000 umbrella does. After she pays a $250 deductible her umbrella pays the rest.
Umbrella insurance policies can be an important feature of personal financial plans. They provide additional insurance that takes over when a claim uses up all of the homeowner's or auto insurance. They even cover some losses that home and auto insurance do not cover, though the policyholder must pay a small deductible for them. They provide insurance amounts as low as $1,000,000 and may provide $5,000,000 or more. Despite the large amounts, they are not just for wealthy people. Here are five (actually six) situations where umbrella policies are vital: