I have discussed, on many occasions, what is estate planning. Part of estate planning is to ensure that your assets are protected. How do we protect assets? One way is to make sure you have enough insurance in place.
There are many ways to protect assets through insurance and these include purchasing life insurance (which could help to pay off a mortgage or other debts if you pass away too soon), health insurance (which will help pay for medical bills and catastrophic medical events), and disability insurance (which will provide you with a paycheck in the event that you become disabled). These are all important, but also important is one type of insurance that is not thought of too often and that is liability insurance.
Why is liability insurance (also known as “umbrella coverage”) important? And, how do you make sure you have enough liability insurance? Let me answer these questions by giving you an example.
Bob is driving his car down a major road known for bad traffic and bad accidents, and pulls into the median to make a turn across oncoming traffic. He isn’t paying attention and pulls into oncoming traffic too soon causing an accident which sends the person he hit to the hospital via airlift. Bob’s car insurance consists of bodily injury coverage with limits of $25,000 per person, $50,000 per accident. That’s all he has. He also has assets – he owns an apartment building that is in his name, individually (and it is value is about $1 million). This is a good thing for the person he hit because, after Bob’s auto insurance policy is tendered to the person he hit, that person will be able to sue Bob and collect against his assets, namely, the apartment building he owns.
Putting aside other ways to protect that apartment building (because there are better ways to protect it than just liability insurance), let’s discuss how Bob could have protected his assets with liability insurance. Most insurers will require you to max out your auto insurance (at $300,000/$500,000) before they will issue an umbrella policy. It is advisable to have at least $1 million in umbrella coverage which would add to the auto insurance coverage you already have. The umbrella coverage can help pay for legal judgments against you (which is likely to happen in Bob’s case), as well as defense costs which can add up quickly, even if you are found not liable.
How much does umbrella insurance cost? One million dollars of coverage can cost as little as $250 to $400. How much coverage should you have? It is recommended that your coverage be as much as your net worth. For an individual who owns rental property, the recommendation could be as high as $2 million to $5 million in coverage. As illustrated above, an umbrella policy can help pay for your legal fees and insure your assets are protected. If you have teenage drivers, host a lot of parties, have a pool or boat, then you have risk factors and should consider obtaining an umbrella policy.