What is umbrella insurance? It's a policy that gives you extra liability insurance above what you have on your auto and homeowner policies. Liability insurance pays for the damage you (or your family members) do to others. It's good insurance to have if you ever face a big lawsuit.

Umbrella insurance limits start at $1 million.

Cost of umbrella insurance: It starts at $200 a year, according to Trusted Choice, a group for independent insurance agents. The average cost is $380 for $1 million or $2 million in coverage.

How it works: Umbrella insurance starts paying out after you've used up the liability amounts in your auto or homeowner policy. For example, say you cause a big car accident with multiple injuries. If your car insurance isn't enough, your umbrella policy kicks in. Without the umbrella insurance, you could be sued for damages that are above your car insurance limits.

Umbrella insurance typically covers:

  • Medical bills, lost income and funeral benefits of people in a crash you cause.
  • Property damage to others.
  • "Personal injury" such as libel, slander, defamation and invasion of privacy.
  • The legal fees to defend you.

You must buy a certain level of auto and home insurance in order to buy umbrella coverage. In other words, you can't buy the state-required minimum of car insurance to save money and then buy umbrella insurance. The minimums needed could be $300,000 in liability on both your auto and home insurance, for example. Your insurance agent can tell you.

Who needs it: If you have assets to protect from lawsuits, such as a house and savings, umbrella insurance is a smart buy. Trusted Choice recommends buying an amount of liability equal to or greater than your net worth. That's because your net worth is potentially what you can be sued for. And having substantial assets can make you a prime lawsuit target.

Remember that your base policies factor into the total amount of liability insurance you have. For example, if you have $500,000 in liability on your auto insurance policy, and you buy a $1 million umbrella policy, you have a total of $1.5 million in liability coverage.

Other policies: Umbrella insurance can be added to a variety of policies, such as renters, boat, recreational vehicle and motorcycle insurance.

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