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How Much Personal Liability Insurance Do You Need?

The world of insurance can be confusing, but it's critical to pay attention to it, lest you end up facing a disaster unprepared.

To figure out how much personal liability insurance you need, a good rule of thumb is to ask yourself how much you have to lose if you're sued. Add up the value of your home, your belongings, and your financial assets. Tack on more for the cost of legal defense. (In some cases, the insurance company will take care of providing a lawyer.) You want to be sure that a lawsuit won't wipe you out or cause significant financial strain.

Fool reader Douglas W. St. Clair wrote in with this additional advice: "I would suggest that you should also project that risk out at least 12 and preferably 24 months. For example, if a salesperson's salary was $100,000 and she had a house and personal property worth an additional $250,000, then simplistically $350,000 in liability insurance is the right amount. However if halfway through the 'insurance' year she was eligible for a $100,000 bonus or a $250,000 inheritance, the amount should really be $450,000 to $600,000. People should look at their financial life out at least to the end of the policy's life. In the case of term life insurance, that is five or more years."

If your total assets are substantial, ask your insurance company about an "umbrella" personal liability policy. Umbrella policies generally offer much more liability coverage ($1 million or more) at lower premiums than individual policies such as homeowner's, renter's, and automobile.

Learn more about insurance in our Insurance Center. You may not have thought about some kinds of insurance, such as disability or long-term care insurance, but they're vital for many people. Take a little time to learn more and you may be very happy you did, if some calamity occurs in the future.

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