The frequency of lawsuits is shocking, but despite the numbers, no one believes it will happen to them.
Too many people use our legal system as their personal lottery. Frivolous lawsuits are not just a problem for big corporations or the rich. They affect people from all walks of life. With a baseless claim and a contingency attorney, anyone can sue you.
The purpose of protecting your assets from frivolous lawsuits is to safeguard what you’ve worked your life to achieve. It is not meant to defraud creditors or shield your money from illegal activities. Just as it is someone’s legal right to sue, it is your legal right to protect what you have from the countless lawsuits disrupting the lives of so many. Protecting your assets using liability insurance is entirely legal, ethical, and even affordable.
Umbrella Liability Insurance
The best way to protect your assets is to avoid a lawsuit, but because we live in a society where you can be sued by anyone for anything, the next best thing is to have someone else pay for your defense and, if needed, the judgment. Where can you find someone who will do this for you? The answer is a personal liability insurance policy, and it’s easier than you might think to get this type of protection.
A personal liability policy is designed to protect you against judgments from property damage, bodily injury, and personal injury lawsuits. The personal liability policy is sometimes called an “umbrella” liability policy because it sits on top of your automobile and homeowner’s insurance policy and covers claims that are either not covered by these policies or that are beyond the limits of these policies.
What to Know Before You Buy a Personal Liability Policy
A personal liability policy is pretty straightforward, but you should be aware of a few issues:
- Primary insurance underlying limits. It is important to remember that a personal liability or umbrella policy requires underlying liability limits on your primary—automobile and homeowner—insurance policies. Make sure you know what limits are needed and if your homeowner and automobile coverage limits are sufficient. For example, if your automobile policy has a $300,000 limit and your umbrella policy begins coverage at $500,000, there is a gap of $200,000 that neither policy covers; you will be responsible for paying this amount if there is a judgment. The easiest solution is to increase the limits on your automobile and homeowner policy to eliminate the gap.
- Typical coverage. Most umbrella liability policies provide coverage for one home and two automobiles only. If you have multiple residences, more than two automobiles, watercraft, etc., make sure they are listed under the umbrella policy.
- Defense costs. The good news is that defense costs are usually covered by umbrella policies; the bad news is that this coverage may be included in the limit of the policy. For example, if you have a $1 million umbrella policy but your defense costs $350,000, you will only have $650,000 remaining if you lose the lawsuit. If your policy includes defense costs within its limit, consider purchasing a higher liability limit.
How Much Umbrella Liability Insurance is Necessary?
Umbrella liability insurance starts at $1 million in coverage and goes up from there. This limit meets most people’s need and shouldn’t cost more than a few hundred dollars a year. If your net-worth is greater than $1 million, I would recommend obtaining an umbrella policy that at least matches your net-worth. For example, if your net-worth is $2.5 million, I would recommend a $3 million umbrella policy.
There are special situations in which you should consider purchasing more coverage:
- Appreciating assets. If you have rapidly appreciating assets, get enough coverage to protect the future growth of the assets.
- Teenagers can put a family’s assets at risk, especially if they drive. Your assets are in jeopardy against lawsuits that result from your children’s behavior.
- High-risk activities. If you entertain often, serve alcohol, drive carelessly, host events at your home, or other similar activities that increase your chances for a lawsuit, consider purchasing more insurance.
Bodily injury and personal injury lawsuits frequently result in multi-million dollar settlements. Umbrella liability insurance is an inexpensive way to safeguard what you’ve worked so hard to achieve.
The proceeding blog post is an excerpt from The Six-Day Financial Makeover: Transform Your Financial Life in Less Than a Week!, available now on Amazon.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.