I’m sure you have heard your uncle over the holidays, a financial person on the radio and hopefully your insurance agent talk about an umbrella policy at some point in your life. What exactly is this and why do you need it? It really is as simple as an extra layer of liability insurance over your existing home and auto insurance.

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Let’s take a look at the following scenario to understand why you need this coverage.

Say you are involved in an at fault accident with another vehicle. Your current auto policy has limits of $250,000 injury for one person/$500,000 total for all injuries in vehicle/$100,000 of property damage. Side note: These are really awesome limits and kudos to you if you carry these high limits.

Unfortunately, the driver of the other vehicle sustains multiple injuries and leaves by ambulance. As weeks go by the surgeries and missed time off of work pile up for the driver of the other vehicle. You end up with a lawsuit seeking damages of $750,000. This sounds extreme but I assure you it can and does happen. Your auto insurance policy would pay the limit of $250,000 BUT you would be left holding the bill for the remaining $500,000. Who has that kind of money lying around? Most don’t, so they end up losing their homes, retirement accounts and even if you don’t have those assets the courts will come after your paycheck.

Now assume you have an umbrella policy in place. The auto insurance pays the same $250,000 and here comes the umbrella insurance to pay the remaining $500,000 including attorney’s fees. It just makes sense in most cases to add this coverage so your financial foundation is on firm ground and not at risk of losing your hard-earned assets or future paychecks.

The good news is most umbrella policies start around $200 a year. Don’t let an accident potentially cause a road block on everything you are working towards.

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