Why have I been stacking up the insurance policies lately? Well, in general, I prefer to self-insure for most risks. Despite what some people may think, it’s not a financial catastrophe if my iPhone is destroyed or stolen. Neither is it a big deal if my laptop breaks down and I need to replace it. Self-insuring means that I’m taking on the risk myself. As the insurance company, I’ll have to pay out of my pocket if I need to replace something, but on the flip side, I don’t have to pay anyone premiums. If you do this with enough stuff, you should come out ahead in the long run (at least that’s what happens to the insurance companies selling you the policies).
However, there are significant financial catastrophes that could change your life (and not for the better). I’d like to take these risks off the table, particularly when it doesn’t cost a lot to do so. As we’ll see, umbrella insurance is one of those cheap policies that only cost you a few dollars a month. The insurance company isn’t expecting to pay out, and you’re not planning to use it, so the premiums are low.
What are some other examples of financial catastrophes? Here’s the list of the big ones:
- Healthcare Expenses
- Loss of expensive property (house, car, etc.)
- Occupation related liability (malpractice)
- Non-Occupation related liability
Life, disability and health insurance are typical products in the marketplace owned by a lot of lawyers. If you have a mortgage, you can’t skip buying homeowners insurance. While states only require you to have a minimum auto liability insurance policy, most people carry some comprehensive collision coverage as well that would replace the value of a destroyed car. Malpractice insurance? I know you have that.
The problem with the auto liability insurance and the home insurance is that their liability coverage might be quite low. New York’s auto insurance laws only require $25,000 of liability insurance for one person. You don’t need to be an emergency doctor to know that the healthcare industry will burn through that $25,000 by the time you make it to the emergency room.
Many homeowner insurance policies have liability limits of around $100,000. While that’s more generous than an auto policy, the average 3-day hospital stay is about $30,000. If you generate liability that leads to an 11-day hospital stay, that extra day is on you.
The easiest solution to increase your liability protection is to increase the liability coverage under your auto and homeowner policies. Increasing my renter's insurance policy from the minimum liability coverage to $1,000,000 of liability coverage only cost me $37.10 a year. That’s not a typo. This is cheap stuff. The same is true for my non-owner’s car insurance policy. Going from the state-mandated minimum payments to $300,000 of coverage costs an extra $89.04 a year. I can’t think of any lawyers where $126.14 a year is going to impact your budget negatively. In exchange for a few bucks, you get extended liability coverage that could prevent some unforeseen event from wiping out years of asset accumulation.
These are the kinds of risks that are great to take off the table. When the outcome is catastrophic, and the premium is minimal, eliminate the threat. It’s silly to focus on a $250 deductible on your collision coverage while cutting corners on the liability portion of the policy.
By now you’re probably thinking: Okay, but what could happen that is going to blow through hundreds of thousands of dollars of liability coverage? The five most common home insurance liability claims are: (1) dog bites; (2) home accidents; (3) falling trees; (4) intoxicated guests and (5) injured domestic workers. If any of those sounds possible to you—and you can eliminate the risk for hundreds of dollars a year—why not take the risk off the table?
So, how much coverage should have? Well, how much stuff do you own? If you’ve built up a lot of wealth, you’re going to need a lot of coverage. If you’re a law student with a negative net worth, the insurance is perhaps a little less critical since you have less to lose. But not only do you need to protect your assets, you’ll also need to hire a lawyer to defend yourself in a potential suit, so you’ll need to throw in the cost of the defense to your policy as well. Don’t forget that any potential litigant will assume that you’re a rich lawyer too, so you already have a target on your back.
After you’ve bumped up the coverage under your existing auto and homeowner (or renters) policies, the easiest way to protect against a financial catastrophe is an umbrella policy that sits on top of all of your other policies. The umbrella policy covers the costs when the other policies are exhausted. If you have a $300,000 homeowners insurance policy and a $1 million umbrella policy, you have $1.3 million of total coverage.
Most well-protected lawyers carry an umbrella policy of at least $1 million, although bumping it up to $2, $3, $4 and $5 million isn’t uncommon as your assets continue to grow. Since umbrella insurance is the last line of defense before coming after your assets, it’s dirt cheap. I bought a $1 million umbrella insurance policy this year for a little over $300 annually. In general, you pay based on where you live and factors like whether you’ve bunched your insurance policies with the same insurer. Umbrella insurance generally requires you to have an auto policy and a homeowners/renters insurance. If you don’t own a car, you can pick up a non-owners auto policy as I did.
The important thing when it comes to insurance is to focus your dollars on the parts of the policy where it will make it a big difference. The iPhone protection plan? That’s fine if you feel that you need it. But if you’re insuring against the loss of an iPhone but neglecting against the possibility of a financial catastrophe, you should rethink your priorities!
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money and is always looking for honest companies that provide insurance for a fair price without selling you products you don't need.
Twelve thoughts on Always Be Ready; Carry an Umbrella
Thanks for another helpful post. Once someone has saved up a lot, what do you think of using an asset protection trust as a cheaper alternative to some kinds of liability insurance like umbrella coverage? Or, perhaps should it be an extra layer of protection on top of a small umbrella policy to make one less of a target? Some of the new trusts in Nevada, for example, look quite cheap now, but I’m not sure how the prices compare to the large umbrella insurance policies.
I don’t know much about trusts for asset protection but would love to have a guest post. Do you want to do the research and write something up for us? One thing to consider, as Managing Partner mentioned below, is that a big value of the umbrella policy is that it will pay for the defense. As he points out, a frivolous claim is worth the value of defending it and so an umbrella policy drops that cost down to zero for the insured.
I have $2M of umbrella coverage and I would highly recommend it for lawyers have have saved a significant amount. If people know you have money, you can be a target for frivolous claims.
As mentioned above – One of the great aspects of umbrella coverage is that they will assume the cost of defense. With the asset trust or LLC, that is on you. For a frivolous claim, the value of the claim is essentially the defense cost – which is only zero when someone else (like an insurance company) is paying.
As a side note, most umbrella insurance (at least here in Chicago) seems to require that you purchase all the underlying insurance from the same company, so you pretty much can’t shop around for individual policy types.
Makes sense that umbrella policy issuers would want to also provide the underlying insurance themselves since the chance of invoking an umbrella policy is based, in part, on the strength of the first-level policies.
It’s so cheap to get umbrella insurance that I can definitely see raising it to $2M of coverage at some point.
I think I got umbrella insurance when I bought my first rental property. Before that most of my assets were in retirement accounts and my co-op. I might transfer the rentals into an LLC for added protection but I think the umbrella insurance is pretty decent protection for now.
As Managing Partner said, even with your assets in “protected” spaces like retirement accounts and a co-op, a lot of people will still assume that you’re a rich lawyer and if there’s a frivolous claim you’ll be stuck paying for defending it. Umbrella insurance makes a lot of sense. I’d up it pretty high if I had rentals.
That’s an excellent point the cost of defending a claim…I should have considered that. Good thing that situation never came up and I have umbrella insurance now!
What umbrella insurance are you using? Any recommendations? Can you have LLC and umbrella same time? Thanks.
We are using umbrella insurance from USAA. It’s a commodity product though, so I don’t think you need to buy it from a particular company. It’s usually cheaper to buy it from the same place where you have home/renter’s insurance and car insurance though.
We have an umbrella policy that’s rolled into our home and auto. It’s maybe an extra $15/month for $1M in coverage? You want insurance against the remote and catastrophic risks – and that’s what the umbrella is there for! I should probably look into what it would cost to bump it up to $2M. It seems like such a no-brainer for professional folks to carry it.
It is a no brainer and yet I wonder how many do? As you said, $15/month is incredibly cheap to take off the table a potential liability (however remote) that could wipe out your entire life savings. Those are the kinds of risks I like insuring against.
With the rates being very low, nobody should fail to have an umbrella coverage in place for the unexpected eventualities. Although some might dismiss it since they have other insurance plans, any wise lawyer should ensure he is fully covered.