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By Kat Tretina, BuySide from The Wall Street Journal featuring Nick Strain, CFP®, CPWA®, AIF®, Senior Wealth Advisor at Halbert Hargrove

No matter who you are, life can throw you a curveball. Whether your child’s friend breaks their arm on your swing set or you lose control of your car on a rainy night, accidents happen, and those accidents can be expensive. This is where umbrella insurance can come in.

According to a recent analysis of liability claims published by Sedgwick, an insurance company, the average personal injury suit award was nearly $1.7 million. If you have a homeowners or an auto insurance policy, your insurer may help with a portion of the cost. But if the cost exceeds the limits of your policy, umbrella insurance can cover the gap.

“If a claim is made against you or your company, an umbrella policy all but guarantees that you won’t have to come out of pocket or worry about a potential lien or judgment against your assets,” says Hunter Garnett, a personal injury attorney in Huntsville, Ala.

Of course, umbrella insurance isn’t for everyone. It’s an added cost, and depending on your assets, you may not need the added protection of an umbrella policy.

Here is what you need to know to decide whether you’d benefit from umbrella coverage.

What is umbrella insurance?

Lawsuits have become a common and expensive issue. The U.S. Chamber of Commerce Institute for Legal Reform reported that total personal liability tort costs—the expenses incurred during litigation and the benefit award paid to victims—grew about twice the rate of inflation in the years between 2016 and 2020, the last date for which figures are available.

In such a litigious society, umbrella insurance can provide peace of mind. It’s an insurance product that kicks in once you reach the maximum liability limit of your auto, boat, homeowners or renters insurance policy. With a policy in force, you aren’t on the hook for the full cost of litigation.

How much do these add-on policies cost? On a typical car or home policy that costs $150 a month, expect to spend an extra $25 to $60, based on information from Insureon, an insurance comparison site.

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