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The Insurance Policy You've Never Heard of — but You Should Definitely Consider

How much insurance do you have? Are your homeowners insurance policies enough to pay for legal fees and damages if someone slips on your stairs? Will your auto limits be high enough if you get in a car accident? Many people don't know the answer to these questions -- and for far too many, insurance coverage will prove woefully insufficient if disaster strikes.

If you're underinsured, your personal wealth is at grave risk. If you don't actually have any wealth yet, your future income is in jeopardy. You need to protect yourself from big losses, and to do that, you need a type of insurance coverage called an umbrella policy.

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What's an umbrella insurance policy? 

An umbrella insurance policy pays costs associated with claims against you after your regular insurance is maxed out. Umbrella policies pay for property damage and personal injury you're found responsible for causing. Policies also cover losses not typically paid for by standard insurance, such as coverage for rental units, or coverage if you're sued for slandering or libeling someone. 

An umbrella insurance policy gets its name from the fact that it provides additional coverage above and beyond what all your other policies -- like auto, boat, homeowners, and renters policies -- pay out. If your auto policy has a $100,000 limit, you cause a car crash, and a court orders you to pay $150,000, your auto insurer would pay the first $100,000, and then your umbrella insurer would cover the remaining $50,000. 

To buy umbrella insurance, you'll need to meet requirements for primary coverage. For example, one insurer I looked at requires at least $300,000 of personal injury liability on your auto insurance policy before it will issue an umbrella policy. Obtaining around $1 million in umbrella insurance costs around $100 to $350 annually, so you get a lot of coverage for a minimal premium. 

Why do you need umbrella insurance?

If something goes wrong and you accidentally harm someone, there's a good chance your primary insurance policies won't be enough to pay what you owe. State minimum requirements for auto insurance range from $0 in liability coverage (in Florida) to $50,000 per person injured and $100,000 per accident in Alaska, while damages for serious collisions often total in the millions. 

If you're held responsible for damages in excess of what your insurance covers, your personal assets are at risk because you could be ordered to pay out of pocket. If you don't pay, you'll end up with a judgment on your credit report that ruins your credit.

Nonpayment has other serious consequences, as well. A lien could be placed on your property, including homes and bank accounts. Your wages could be garnished, including future earnings. You could be forced to choose between filing bankruptcy to reduce, or eliminate, the debt you owe, or pay damages for decades.  

Umbrella insurance can protect you from all this. When you have an umbrella policy, you'll have plenty of insurance for even the most serious disasters, and you'll have peace of mind knowing you're fully insured for most problems that might arise. 

Find out from your insurer how to get covered

Most insurance companies issue umbrella policies, so reach out to your auto, renters, or homeowners insurer to find out about obtaining coverage. You and every member of your household can be covered by a single umbrella policy, so you can protect yourself, your spouse, and your kids from big losses in case of an accident.

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