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No, an umbrella policy has nothing to do with the weather outside. Although, like an actual umbrella, the policy can keep you covered from a wide range of threats. Your financial assets - both current and ones in the future - are protected via an umbrella policy.

So what exactly is an umbrella policy? To explain that, first consider how you're protected by the liability coverage on your home and/or auto insurance. The amount you're insured for through those policies can protect you from the financial costs of any damages done to your car, home, your own body, or that of anyone else. However, what happens if those damages exceed that amount you're insured for through your basic auto or home insurance?

That's where an umbrella policy kicks in. It's similar to liability insurance but it covers any financial damage exceeding that coverage, according Kiplinger Magazine. It's particularly useful in the event of a lawsuit. If you're in a car accident with another person and he or she decides you sue you, you could immediately be at risk to lose a lot of money. Perhaps they're suing you for financial restitution - even if you're able to win the case, the cost of a legal defense can quickly tap out your liability coverage and then exhaust your savings and income. It's not a pretty picture.

That's part of the reason an umbrella policy can be so valuable. It will keep you covered when your normal insurance falls short.

So how much should you purchase? Kiplinger suggests buying a policy that's worth at least as much as the total value of your assets, or your net worth. If you make $100,000 per year or have a net worth of $1 million, you should have at least that much in umbrella coverage. However, some experts say $1 million is advisable even if your net worth is not that high. That's because in a lawsuit, you can be sued for current and future assets, meaning you could be financially crippled now and well into the future.

The best part about an umbrella policy is that it's normally not expensive. It depends on certain risk factors, but an average person with one home and two cars can normally get $1 million in coverage for no more than $200 per year, with an additional $100 per year for another $1 million in coverage, said Kiplinger. The price is so low because umbrella coverage normally doesn't kick in until after you've exhausted your normal liability coverage - usually around $300,000 to $500,000.

Adding it all up, it only makes sense to keep yourself covered with an umbrella policy. And once you've got one, make sure to update it regularly with changes in income or net worth. After all, an old umbrella full of holes won't keep you out of the rain nearly as well as a new one.
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