Posted on: October 1st, 2018
What would happen if you or your child caused a car accident that resulted in serious injuries or the deaths of others?
How would you pay for the treatment and damages of someone who was hurt in your home and claimed negligence? What happens when they claim to have suffered greatly because of the injury?
What if your dog was attacked by a stranger on your property and bit the person in self-defense—but you were still sued?
The fact is, the wealthiest entrepreneurs and families typically face these types of questions head-on. As a result, they are very attuned to making sure their wealth is protected from lawsuits resulting from scenarios like these.
That said, one component of a rock-solid wealth protection plan that is too often overlooked or underused—even by the affluent—is the umbrella policy.
Here’s why an umbrella policy can make sense if you have significant assets.
You have insurance policies on your house and vehicles. You might also insure other types of property you own (boats, airplanes, etc.). But do you have enough coverage, considering your personal wealth?
If you’re financially successful, the answer is probably a resounding NO.
The reason: Most insurance policies top out at around $500,000 of liability coverage. That’s not likely to be nearly enough if you find yourself involved in a serious accident. For example, people who get hurt on your property may seek a whole lot more than $500,000 in damages. And when they find out you’re worth a substantial amount, they may well pursue an even larger payment.
That’s where an umbrella policy (also called an excess liability policy) can make a big difference. An umbrella policy kicks in when your other liability policies (such as your car insurance) hit their limit. Example: You are involved in an accident and are being sued for $1 million, but your car insurance covers only $300,000. In that case, your umbrella policy could cover the difference so you don’t have to use personal assets.
Clearly, then, an umbrella policy is useful to help protect your assets from larger claims and lawsuits.
To have an umbrella policy, you need to have the other insurance policies (car, homeowners, etc.) already in place.
Important: Make sure there isn’t a gap between your other policies and your umbrella policy. Where your car insurance ends, for example, the umbrella should take over—otherwise, you’re on the hook for that gap. And if the underlying car insurance policy is not addressing certain risks, then the umbrella policy can also miss covering these risks.
We find that most wealthy individuals and families don’t have large enough umbrella policies to adequately protect their assets. If a legal judgment is greater than your liability coverage, you are going to have to come up with the difference—which may mean selling assets, possibly at fire-sale prices because of the bind you’re in.
Pro tip: A general rule of thumb is that if your net worth is $20 million or less, make sure your umbrella policy covers what you’re worth. If you are worth more than $20 million, it becomes a question of how much risk you’re comfortable taking on.
Many ultra-wealthy entrepreneurs, for instance, will get as large and comprehensive an umbrella policy as possible. While the odds of having to use it are in their favor and it’s even more unlikely that they will reach the limits of the policy, the possible financial downside from a serious accident and substantial lawsuit is something they prefer not to even consider. As an entrepreneur with a $10 million umbrella policy told us, “It costs less than putting an attorney on retainer to defend you in the event of a suit.”
That said, it can be challenging to insure up to the amount you wish. That’s because some insurance companies cap the size of the policies they offer, usually at $5 million. If you require more than $5 million in coverage, you may need to enlist a specialty insurance company, which might be able to offer policies of up to $100 million
How much will a hefty umbrella policy set you back? A number of factors determine the cost of coverage, including:
Good news: Umbrella policies tend to be relatively inexpensive, because the severe occurrences that trigger them are uncommon.
A married couple in their 40s are living in a high-value home (replacement value over $1 million). They own three premium automobiles, and both have good driving records.
A married couple in their 50s own two very expensive homes, six automobiles and a 40-foot boat. In addition, they have three children, two of whom are teenage drivers. Driving records to date are good for all.
The upshot: If you don’t have an umbrella policy, run—don’t walk—and get one. If you do have an umbrella policy, make sure you’re sufficiently covered—and boost that coverage amount if you’re not.
Action step: If you think you or a family member could benefit from an umbrella insurance policy, contact your legal or financial professional to explore the topic further.
This report was prepared by, and is reprinted with permission from, VFO Inner Circle. AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.
Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.
Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures
VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
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