An umbrella policy is usually a policy that is obtained by someone who owns significant assets such as a house and a car combined, and may have reason to believe they would need to protect those assets from being seized to pay off a judgment or other problem. While relatively few people actually buy an umbrella policy, fewer still actually find themselves in need of one, but those that do are never disappointed or filled with regret that they spent that little extra bit of money every year to provide the extra layer of protection.
Put in the simplest terms, an umbrella policy provides protection above and beyond your standard auto or homeowners insurance policies by "picking up the tab" once your limits on those policies have been reached. Since this is an event that only rarely happens in anyone's life, the cost of a plan is usually fairly low - perhaps $300 per year for $1,000,000 of coverage or more. Umbrella policies only kick in to assist a homeowners or auto insurance policy once the limits have been reached on the other policies, never before, and how much coverage you have on those two policies will affect the premium you are offered. Most commonly, these policies wind up being used to protect their owners from lawsuit liability damages such as after a car accident where they were at fault, or if there is an injury on their property for which they are ruled to be at fault.
Umbrella policies are not purchased without at least a little tinge of paranoia about the world and one's circumstances, but the way the world works today, that paranoia is probably a very good thing. The chances of being sued in an accident that you are found to be at fault in have increased substantially in the last two decades, and if you are a person of means, the odds climb drastically higher. Add to that the higher cost of medical insurance or visiting a doctor to recover from something like a car accident and you can see how standard policy limits - such as those required by your auto loan carrier - do not make the difference anymore in completely paying to protect you after a serious accident. For their low price, umbrella policies provide an enormous amount of peace of mind, and limits can reach as high as $5,000,000. This amount can provide a generous buffer if you had a fatal accident that was your fault and found yourself slapped with a lawsuit that is easily going to swallow your $100,000 liability insurance policy. The coverage provided may also help to pay for your legal defense.
These policies are not for everyone. If you do not have substantial assets to protect, you may want to reconsider the need for one. There are no debtor's prisons in the United States which means that if you are living in an apartment and driving a vehicle and get sued for an accident, they could award a one hundred million dollar judgment against you but if you don't have it, you don't have it - what are they going to do, seize your comic book collection? These plans are for those who have assets they want to protect against possible loss, not only against a possible lawsuit, but even from very high medical expenses that you might also find yourself liable for.