What will happen if you or your child causes a car accident resulting in serious injuries and death of others?
How would you pay for the treatment of someone who hurts himself or herself in your home and claims negligence? What happens when they claim to have greatly suffered because of the injury?
What if a stranger on your property beats your dog and in self-defense your dog bites the person, and then you are sued?
The wealthy are often very attuned to making sure their wealth is protected from lawsuits and related scenarios. They often turn to professionals to put asset protection plans in place. A component of a solid asset protection plan – which sadly is too often overlooked – is the umbrella policy. In fact, for some people, the proper umbrella policy is all they really need.
Most people have an umbrella policy (also called an excess liability policy). The policy kicks in when your other liability policies, such as your car insurance, hit their limit. For example, if you were in an accident and are being sued for $1 million and your car insurance will only cover $300,000, your umbrella policy could potentially make up the difference.
According to Joseph Weiss, a leading authority on liability insurance with Bruce Gendelman Insurance Services, “Some insurance companies put a cap on the size of the umbrella policies they provide. Usually this is $5 million. First of all, most any really serious accident could conceivably blow through a $5 million liability policy. Now if your net worth is $5 million or less…no problem. Other hand, if your net worth is greater than $5 million, it’s probably a good idea to get a larger umbrella policy. If a legal judgment is greater than your liability coverage, you are going to have to come up with the difference and that usually means selling assets…sometimes at fire sale prices.”
The solution is incredibly simple. If you don’t have an umbrella policy, run (do not walk) and get one. If you do have an umbrella policy, make sure you’re sufficiently covered. If coverage limits don’t adequately protect your vulnerable assets, then raise the coverage to the appropriate level. If you’re your unsure what that level should be, consult with a qualified advisor who can help you make that determination. There are a number of factors including whether assets are already protected by say irrevocable trusts or life insurance. Determining these proper coverage limits can be one of your best asset protection strategies as part of your overall wealth management plan.