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Matthew MacDowell:

What happens if you're in a car accident with major injuries or a houseguest slips on your stairs and is seriously hurt? You may have home or car insurance, but how much financial protection do they offer? Probably not enough. Coverage for these policies usually tops out at $500,000.

If there's a legal judgment against you, it's not likely to make much of a dent in your obligation, not with the large legal awards often associated with serious accidents. What happens when your insurance coverage falls short? You could face court-ordered liquidation of your assets. It starts with your savings and investments, and then moves on to your real estate and personal property.

Withholding of income is another possibility. Thankfully, such devastating outcomes can be easily avoided. An umbrella liability policy can help protect your assets from major claims and lawsuits. We'll take a look at these important policies, what they cover, what they don't, how much coverage you'll need, and how much it's likely to cost.

The first thing you should know is that it's additional insurance. It sits on top of the liability insurance in your primary homeowner's and auto policies. It begins to pay when the limits are reached on those policies. For the most part, umbrella liability coverage mirrors what you have in your primary policies.

And it usually covers claims related to bodily injuries, as well as libel, slander, and defamation. Damage caused to someone else's property is covered as well. What's not covered? Typically boats longer than 26 feet and airplanes are excluded.

So are business pursuits and intentional acts. If you purposely injure someone or damage someone's property, your umbrella policy won't pay, and neither will any of your underlying policies. So how much umbrella coverage do you need? Consider an amount that is at least equal to your net worth, up to $20 million.

Almost all liability judgments against individuals and families are under $20 million. Most mass market insurance companies limit umbrella liability coverage to a maximum of $5 million. Some will make exceptions up to $10 million. And a few specialized companies focus on the high-net-worth market.

OK, so what does umbrella liability insurance cost? Well, that's the good news. It's actually really affordable. Roughly speaking, the annual cost per million dollars of coverage ranges from $100 to $500.

At coverage amounts greater than $5 million or $10 million, the incremental cost per million dollars of coverage can jump to $600 or more. Still, not a huge financial commitment for such important insurance. Let's review the main points we've covered here. Serious accidents are rare, but they do happen.

Homeowner's and auto policies aren't likely to provide enough liability coverage if there's a large legal judgment against you. Getting enough liability coverage to protect your assets is relatively easy and surprisingly inexpensive. Those are just the basics, of course. You may want to seek the advice of an experienced insurance advisor.

Serious accidents can be catastrophic to your wealth and lifestyle. But with the right insurance coverage, they don't have to be. If you'd like to learn about other types of property and casualty insurance, please watch our video titled What Insurance Do You Need for Your Home.

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