Umbrella insurance actually "sits" on top of your auto and homeowners or renters liability coverage. Say you have a per-person liability limit of $100,000 on your auto policy. Say also that you cause an accident in which a driver or passenger in the other car is ultimately awarded $250,000.

Your auto policy will pay the first $100,000, and your umbrella will kick in the remainder. Well, almost the remainder. Like auto policies, some umbrella policies have deductibles, usually anywhere from $250 to $2,500. But a deductible of even $2,500 is a small price to pay if you're hit with a $250,000 judgment.

Because umbrellas are over the top of the auto, homeowners or renters liability limits, some insurers offering umbrella policies require you to have your auto and homeowners with these companies as well. But that's not really a problem because most insurers are positively tickled to be able to provide someone's auto, homeowners or renters, and umbrella insurance.

In addition, most insurers offering umbrella coverage require you to have liability limits of a certain amount on your auto and homeowners policies. Typically, this minimum is $300,000 for homeowners and $100,000 per-person for auto.

Yes, you could chose to increase your auto and homeowners liability limits to, say, $1 million for each policy. But not every auto and homeowners insurer offers such high limits.

Tip. And, do you know what? Your umbrella policy is usually a cheaper option than increasing the limits on your auto and homeowners insurance. Plus, you get the additional "personal injury" coverage that is not available in your auto and homeowners or renters policies.