The (not so) Magic Umbrella Policy
I was recently contacted by a physician with seven figures in exposed home equity and other significant assets from a state with less than $100,000 in homestead protection, the amount of home equity protected from creditors by statute. As part of the comprehensive plan, she requested I outline a specific strategy that included various layers of legal structures. These structures addressed her needs in a holistic way that integrated an estate plan, tools to hold existing wealth, liability insurance, and safe ways to protect her home and multiple income streams.
When I followed up, the physician said she had consulted with another advisor. A one-stop, life insurance sales, financial planning, tax planning, and legal strategy firm that had offered her a “much cheaper system that did the same thing.” When I asked a few questions it turned out to be nothing more than a few LCCs with some very significant gaps and holes in the protection it provided. Most interestingly, it did not address protecting the doctor’s home, her single biggest current asset.
When I pointed this out to her and asked how she was told to protect the $1 million plus in her home her response was, “with an umbrella policy.” This advice was so shockingly bad, and incomplete, that I asked if it actually came from an attorney before I explained the following details:
- A seven figure personal liability umbrella insurance policy is vital for nearly everyone and provides a vital layer of defense for issues related to your home and auto liability. Having such a policy in place was part of my own recommendations as well, but only to protect her as the homeowner against liability for claims that arise on or from the property itself, like an accident or injury that happens at the house.
- I also covered why the personal umbrella, on its own, is not complete and adequate protection from anything outside that very narrowly defined scope of coverage and would not protect her from claims related to her medical practice or other business liabilities including malpractice, a data breach, an employment lawsuit, any additional professional risk.
- As such, a variety of specialty liability insurance that should be considered as part of any competent asset protection plan was also required and recommended to fill the large, dangerous gaps left by her personal liability insurance and medical malpractice polices. None of this had been prescribed to the doctor as part of her LLC proposal or even discussed with her by these “experts.”
- Finally, we reviewed that as it was going to stay in her own name, her $1 million home equity and other assets would remain exposed to any and all of the above mentioned personal or professional risks not covered by her umbrella policy or medical malpractice policy. In some cases this was because she was simply uninsured for the risk at all. In other cases she may have been under-insured, the risk that the insurance she did have in place was not enough to cover the actual size of the award.
Despite these two glaring issues, (her biggest asset remaining exposed and the lack of competent advice and education on the insurance she needed) she was attracted to the low fee quote and chose the cheap, easy answer that she wanted to hear over a comprehensive plan that provided much more predictable results and significantly better risk management. Hopefully, she will beat the odds and never face a significant personal or professional legal challenge. If she does, she’ll be stuck with what she thought her success was worth doing to protect when we spoke, and legally prohibited from doing anything else.