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How much umbrella insurance do I need?

April 20, 2013: 6:30 AM ET

How do I know whether my umbrella policy coverage is right? I don't want it to be too large or too small. — R. King, Tampa

Base your umbrella policy—which insures you for amounts beyond the coverage of your other insurance — on the value of your assets. Why? In a lawsuit (say, after a serious collision), lawyers will aim for your available assets but probably settle for a comparable insurance amount. Your 401(k) is protected, but your home, IRA, and a portion of your salary may not be, depending on state law.

A good start for a coverage amount is to add up the value of non-retirement-plan assets. Add $1 million for peace of mind, says Jack Hungelmann, author of Insurance for Dummies. The first million of coverage averages $200 annually; each additional million runs just $75 to $100.

— Stephanie AuWerter

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