Dear Insurance Adviser,

What is umbrella insurance, and how do I know if I need it? 

-- Rainy-Day Woman

Dear Rainy, An umbrella policy was created to provide additional coverage when a lawsuit brought over injuries and/or property damage that you cause exceeds the liability limits on your car insurance, home insurance, boat insurance, etc.

An umbrella policy has three advantages. It provides additional lawsuit coverage of $1 million or more. It provides added coverage for defense costs, which can easily amount to $100,000 or more. And finally, it provides liability coverage for some lawsuits not covered by your underlying auto or home insurance. Examples include if you're sued over an incident involving a boat you rented on vacation, a car you rented in Europe, or even your work on a nonprofit board of directors.

Everyone concerned about losing income or assets in one large lawsuit needs an umbrella policy. An umbrella insurance policy is the absolute best buy in the insurance business. It costs only about $150 to $200 for the first $1 million of coverage, then about $100 for each additional $1 million.

You can't control whom you might injure. If you injure, for example, the CEO of a large corporation, a professional baseball player or a doctor, you would owe for lost wages, medical bills, and pain and suffering. The lost wages alone for those types of people, if they can't work for 10 years, could start anywhere from $2 million to $3 million and run up to as much as 10 times that amount. Medical bills might be about $500,000. And then, there is compensation for pain and suffering.

The point I'm making here is that you can't be overinsured for lawsuits.

When buying an umbrella insurance policy, buy $1 million more than you think you will need. You can't go back and buy more later, if and when you need to use it.

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