Not raining? Take an umbrella anyway…I really do think that umbrella insurance is one of the more misunderstood insurances that doctors do need to protect your assets. I asked the team at Forme Financial, one of our key resources, to help me present the ins and outs of umbrella insurance and why it is important for physicians.
As physicians, we experience risk differently than most professionals. Of course, we know about the benefits of insuring against several of the most common financial pitfalls:
- Life insurance to protect against an unexpected death and the chaos it could cause to your family
- Hopefully you already insured your most valuable asset – your ability to earn a high and attractive income, with adequate own-occupation disability coverage
- We have health insurance to stay well
- Also property/casualty/auto insurance for our worldly possessions
- We know all too well, the risk associated with malpractice, and have policies for that
Why you need umbrella insurance
With the exception of malpractice insurance, our non-physician counterparts probably considered these too. But as a doctor, we are attractive targets to many. In some cases, this is an advantage and you will be presented with opportunities not available to everyone. However, in other cases, you will be seen as a target with “deep pockets” and the vultures gather. Even a minor fender bender carries an added element of risk for you if the other party thinks there is a well of dollars waiting for an attorney and a lawsuit.
How exactly, that risk may occur is an added element of uncertainty. And it makes it difficult to cover all your bases. This is precisely why umbrella liability insurance should be part of your “emergency tool kit.”
The ins and outs of umbrella insurance to cover your assets
Umbrella liability insurance, as the name implies, covers you broadly by picking up where your other policies stop. For example, if you need to use your homeowner’s insurance or your vehicle insurance to cover a loss or claim against your property, and that policy only covers a portion of the expense, your umbrella policy can cover the difference.
You obviously want high limits on these auto and home policies. However, umbrella insurance is a great safety net for your assets.
What does it cover
An umbrella policy will usually cover bodily injury liability and the cost of those damages to the injured party. It will typically cover their medical bills or expenses to treat an injury. If the incident involves someone’s death, it may pay their funeral costs and your legal defense costs.
If you own rental real estate, your umbrella policy can help extend coverage for certain losses at those properties. However, umbrella insurance in itself is not enough asset protection for rental real estate. LLC formation is important.
If you damage someone else’s property, an umbrella policy can cover the damages.
Other common coverages include defamation, slander, libel among others.
What doesn’t it cover?
Insurance companies will only allow you to purchase umbrella liability coverage if you already carry auto, homeowners, or another form of insurance. It is supplemental coverage, not primary coverage.
You also typically must meet certain coverage limit minimums before you can add umbrella insurance.
So, now that we have adequate primary insurance, what won’t umbrella cover?
Since it is really intended as liability coverage, it won’t include things like:
- Professional malpractice – you’ll need separate insurance for that. This is important to recognize when determining how much malpractice insurance you need!
- Property damage or injuries in certain circumstances, like an uninsured dog breed or uninsured recreational vehicle
- Injuries or damage that your business may be liable for – there are business umbrella options for these
How much should a physician have?
The more you have, the more you should have.
As a rule of thumb, you should have coverage equal to the amount of assets you own. In other words, “CYA” – cover your assets.
Another rule of thumb is to have coverage in excess of any possible judgment against you. As a physician, it can be high. One advantage of umbrella coverage is that you and the insurance company’s interests are completely aligned.
They don’t want to pay a benefit any more than you want to be sued for one. Because they don’t want to pay the claim either, you essentially have hired their team of attorneys to work towards your mutual best interest. Avoiding a large claim is their specialty.
But what’s the number?
Most of the physicians we work with start with a policy of $1 or $2 million. But as their net worth grows, it’s not unusual to see policies of $5 million or more.
Some of this is asset related, but other times, it’s lifestyle related. A physician with several teenagers behind the wheel, or multiple recreational vehicles, or perhaps a boat may be exposed to more risk than a physician that doesn’t have that same risk profile.
I obtained umbrella insurance coverage of $5 million out of training despite having assets much less than that amount. Why?
What is the typical cost?
The good news about umbrella insurance is that it is typically very inexpensive relative to other coverage you get. Again, depending on your personal risk profile, policies can be as cheap as $200 – $300 per year for $1 million in coverage. However, tack on a boat, RV, driving teenager…, and that premium can be more.
In fact, my $5 million policy costs $500/year. It’s so cheap and gives me peace of mind. So for me, its s very worthwhile.
One gimme’ and gotcha’ with umbrella policies is that insurers will often give you a discount if you bundle multiple policies together. Auto, homeowner, plus liability will get a discount.
However, that same insurer will likely only let you purchase umbrella if you have a minimum level of liability coverage on those same policies which may involve a larger premium on the underlying auto or homeowners insurance.
All of my home, auto, and umbrella insurance is bundled under one company that I obtained through an independent broker.
First, take an inventory, assess your risk profile and evaluate your options:
- Make an inventory of all of your assets. Need a way to do this? Look here.
- Make an inventory of all of your insurance policies. Auto, home, etc.
- Outline your coverages
- Are there shortfalls in your basic coverage? Fix those first. The insurance company will likely require it anyway before you are eligible for umbrella liability.
- Identify your gaps
- Do your basic liability amounts cover your assets or a potential judgment against you?
- Identify your risk profile
- Where are you most exposed? Do you spend a lot of time in your car? Do you have minor children who drive? Recreational vehicles? Rental properties? Boat?
- Identify your options
- Can you get more coverage, is pricing attractive, can you bundle, etc.?
- Gather your team
- You are going to want an independent broker that can shop you around to find the best deal. You can reach out to Forme to help with this here.
Evaluate which options are best for you and get after it! You remain an attractive target – don’t compound it by being an easy one!
In my mind, getting the right insurance in place is the first step towards insuring your financial well-being and getting on the right path to financial freedom. Learn about the rest of the steps in the free masterclass webinar, The 12 Steps to Financial Freedom for Physicians!
What do you think? Do you have umbrella insurance to cover your assets? How much? How did you obtain it? Don’t have it? Why not? Let me know in the comments below!