Recently our teenage daughter achieved one modern milestone of autonomy– she passed her driver’s license test. While a first-edition license is one hallmark of independence, it’s also the gateway to potential fender-benders, property damage, or worse – medical bills or accidental death claims. Naturally, in the week leading up to her driving test, my husband and I scrutinized the details of our auto and personal liability insurance policies with extra focus. While we have full confidence in our daughter’s driving skills, we substantially increased our liability coverage. “It’s the other drivers we are worried about,” we assured her.
After all, excess liability claims in your personal life can be a total financial catastrophe – far worse than divorce. As many physicians already know, a solid malpractice policy is imperative to cover the costs of a claim – covering both a robust defense attorney and payment of the plaintiff’s award, whether by settlement or judgment. But what about incurring liability in your personal life, outside of your medical practice, business, and investments? What about volunteering on a non-profit board, operating a rented watercraft, or driving abroad?
HIGH PERCEIVED WEALTH = HIGH EXPOSURE TO LIABILITY
The wealthier you are (or are perceived to be), the more exposure you have to a potential creditor. And physicians have a reputation for being high-income, high-net-worth, and highly insured individuals. Fortunately, the solutions and strategies to minimize exposure and pay claims are far less expensive than a malpractice policy with the same limits.
Your responsibilities as a homeowner, driver, or volunteer board director can expose you to liability claims of injury, accidental death, property damage, and alleged libel, slander, or defamation of character. While most auto/homeowner claims are easily covered by the standard $300,000 liability coverage, the consequences of coming up short when payment exceeds this amount can be devastating to your finances. It’s critical that you calculate what your unprotected assets are in the event of a claim and consider purchasing excess liability coverage.
So what are some examples of unprotected assets? That depends on how assets are titled and if they are legally protected from the claims of creditors. It also depends on which state law has jurisdiction over your assets and who is named in the claim. Generally, the list of protected assets includes your spouse’s assets (unless they are named in the claim), all 401k accounts, some IRAs, joint tenants by entirety homes with a spouse, life insurance, annuities, irrevocable trusts, and your children’s college savings accounts. What is least protected can include your cash and investment accounts, rental properties, vacation homes, business interests, and future earnings.
Most solutions and strategies are fairly affordable and keep your assets out of the reach of creditors.
The first line of defense is an excess personal liability policy, also known as an umbrella policy. It is called “umbrella” because it “sits over” your existing auto and homeowner’s insurance. You can customize your Umbrella policy with endorsements to be sure it has coverage for responsibilities beyond auto and homeowners. Like malpractice insurance, an umbrella policy will defend you in a lawsuit and pay claims up to the policy limit, which is generally offered in $1M increments. The higher your exposed assets, the higher the limit you need. A general guideline is for your policy limit to equal your exposed net worth plus future earnings. That is why most physicians’ umbrella policy limits are between $5-$10 million.
The second line of defense is to properly title your assets. Consider placing each rental property in an LLC, maxing out retirement plan contributions, investing in life insurance, adding your spouse to your primary home title, and paying off your home mortgage.
Some of the solutions and strategies which maximize asset protection might not coordinate with your other financial goals. And that is where a financial advisor can help you prioritize goals, calculate your unprotected risk exposure, and recommend a customized plan to minimize liability risk.
The opinions and analyses expressed in this newsletter are based on Curi RMB Capital, LLC’s (“Curi RMB”) research and professional experience are expressed as of the date of our mailing of this newsletter. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. Curi RMB makes no warranty or representation, express or implied, nor does Curi RMB accept any liability, with respect to the information and data set forth herein, and Curi RMB specifically disclaims any duty to update any of the information and data contained in this newsletter. The information and data in this newsletter does not constitute legal, tax, accounting, investment or other professional advice. Returns are presented net of fees. An investment cannot be made directly in an index. The index data assumes reinvestment of all income and does not bear fees, taxes, or transaction costs. The investment strategy and types of securities held by the comparison index may be substantially different from the investment strategy and types of securities held by your account. RMB Asset Management is a division of Curi RMB Capital.
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