An Umbrella Policy kicks in when you reach the coverage limit on a home, renters, condo, watercraft or auto policy. In the rare event you are sued, you could be forced to pay a legal judgment from your current assets and future earnings. The policy can pay for defense costs, which can quickly add up even if you win your case, and covers you for libel and slander.

If you get sued you could lose any assets you have built up, including investments and all of your savings. Even if you have no established assets, a court could award benefits to the third party if you are held liable for damages. When you have no assets, you may be obligated to pay with future earnings. If you are a student studying for your degree, or even if you expect to eventually be promoted and work your way up to a high paying position, your future earnings can be targeted.

A $1 million umbrella costs between $150 to $300 per year. Most insurers require you to have at least $250,000 of liability insurance on your auto policy and $300,000 of liability insurance on your homeowners’ policy.