In the game of Monopoly, it’s a bit of a bummer if you land on the “Do Not Pass Go, Do Not Collect $200” square. When liability claims strike in real life, you can lose a lot of actual money – especially if you’ve got a lot to lose. How well does your current insurance line-up protect you?
If you’ve got the usual property & casualty line-up – home, auto, maybe a $1–$2 million umbrella policy – you might think you’re all set. But, especially if you’re a high-earning professional, there can be complicated gaps lurking in your policies’ fine print, exposing you to dangerous risks. Successful families are well-advised to ensure that the excess liability coverage they think they’ve got is actually optimized for their unique needs.
You May Be Underinsured If …
If your net worth exceeds your liability coverage, you are probably underinsured. That’s a simple rule of thumb. But even if your nominal liability protection does exceed your net worth, it still might not be enough, depending on your particular risks.
- Career – Professional athletes; attorneys who publicize large public liability settlements; hedge fund managers; professional traders; and similar prominent professionals might need extra excess liability coverage to protect against unjust claims for injury, negligence, libel, or slander. As we’ll touch on more below, it’s worth emphasizing that legal judgments can force you to pay damages from your existing net assets AND your future earnings.
- Stuff – If your success has provided you with a lot of cool possessions – a lovely estate along the shores of Lake Michigan; a second home in Taos; exotic automobiles, boats and motorbikes; other collectibles – you probably need more protection than others without such assets.
- Lifestyle – If you own a dog, a trampoline or a swimming pool; have teenage drivers; own rental property; and/or entertain frequently, your lifestyle may warrant higher liability coverage.
- Community Service – While serving on not-for-profit boards can be richly rewarding, it can also increase your liability exposure. For example, a homeowners association (HOA) board member can often be individually sued for damages related to board actions. Many umbrella policies cover activities related to HOA service, but most standard homeowners insurance policies won’t.
Extra Protection for Pennies on the Dollar
A simple cost/benefit analysis suggests most individuals should have some excess liability protection in case their standard insurance gets tapped out. If you’re a successful professional, odds are even higher that you’ve underestimated your excess liability needs. (Note: Umbrella insurance is a form of excess liability coverage; there also are excess liability policies that are more targeted, or otherwise structured differently to best cover your particular requirements.)
The benefit limits of excess liability policies are usually higher than those of your primary policies. They typically begin at covering up to $1 million, and can increase dramatically from there. When you’re throwing around coverage in the millions, this may sound like it’s going to cost you dearly. In reality, excess liability coverage only comes into play after you’ve exhausted your underlying insurance. So, it’s typically quite affordable for what it provides. Should you end up needing it, you’ll find it well worth the pennies you’ve paid on the dollars you’ll receive.
Calculating the Correct Excess Liability Coverage
Consider the following scenario. If you are in the thick of accumulating wealth and saving for your long-term goals, your current net worth may range between $500,000–$1.5 million. That’s a lot to most folks. But don’t forget to factor in your lifelong earning potential – your human capital. Let’s say your annual household income is $750,000. In 20 years assuming 3% inflation, that will have grown to an annual paycheck of more than $1.3 million. If you kept every penny during those 20 years, you’d end up being worth around $21 million from your salary alone.
That’s a lot of potential worth … as well as a lot you could lose to an unjust claim. Consider your excess liability coverage from that perspective … although insurance industry professionals have assured us that successful claims exceeding $5 million are rare.
Objective Advice on Lowering Your Liability Risks
If you want to know more about how to adequately protect your financial and human capital against unjust takings – without having to push a pointy pencil around all by yourself – consider sitting down with us today for a Cogent Conversation®. We can listen to what success looks like for you, review your current insurance coverage, build an advanced plan tailored to you, and help you execute that plan every step of the way.
We are not insurance agents or similar commission-based providers whose advice and agendas may be colored by sales-oriented incentives. Dedicated to serving your best interests in our fiduciary relationship with you, our sole source of compensation is the fully transparent fee you pay us for the wealth management services we provide. That’s it.
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