By Our Guest Writers W. Ben Utley, CFP® and Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF
As a doctor, you have a bright red target painted on your back with a big dollar sign in the bull’s eye. Everybody wants a piece of you. While there’s nothing you can do to keep them from suing you, you have plenty of options when it comes to protecting yourself.
At work, you have malpractice insurance. But what can you do about a liability you might incur throughout the course of your life outside your profession?
If you crash your car into someone, your auto insurance will cover you. If someone trips and falls on your property, your homeowner’s insurance covers that. But what if something really bad happens? What if the defense—and the damages—are substantially more than the limits on your policies?
You can pay the costs out of pocket if you have the resources. But if you don’t, the person who sues you may attach your future earnings to satisfy the liability.
Open Your Umbrella
To protect yourself, what you really need is something like malpractice insurance for everyday living. In fact, there is a special form of property and casualty insurance that’s layered on top of your homeowner’s and automobile insurance policies. Since it covers liability “above and beyond” that afforded by your base layers, it’s known as “umbrella” insurance.
This “excess liability insurance policy” sits on top of your other coverage and picks up the liability where the base layers leave off. It can pay for your legal defense and cover the damages up to the limits of the policy.
For example, let’s say you are implicated in a motor vehicle accident and found liable for a bodily injury claim totaling $1,500,000. If your auto policy’s liability limit is $500,000 and you did not have an umbrella policy, you would be expected to meet the remainder of that claim ($1 million) yourself. However, if you had a $1,000,000 umbrella policy layered on top of your auto coverage, you would be adequately protected since your base policy would pay the first $500,000 and the umbrella policy would cover the rest of the claim.
Umbrella insurance may also protect you from losses not covered by basic liability insurance. It often covers damages for unusual occurrences including personal injury losses due to libel, slander, wrongful eviction, false arrest, and invasion of privacy. Your umbrella liability policy might also pay for damages incurred in situations where coverage from auto and homeowner’s insurance might not apply, as may be the case when you are traveling.
In addition, an umbrella policy might pay a proportionate share of a claim even if your basic liability insurance policy cannot pay its portion, either because you failed to comply with the conditions of the base policy or because the base layer insurer has become insolvent.
Be aware that umbrella policies usually do not protect you against damages you cause intentionally, liability that you accept contractually, liability related to planes, boats and other “toys” (which should be covered under other policies) or damages arising out of business or professional pursuits (which is usually covered by your malpractice insurance).
Big Risks, Little Premiums
If all this talk about millions of dollars makes you think, “this insurance must be expensive…” guess again. The perils covered by umbrella insurance are as rare as they are catastrophic, and the premium reflects this fact. The average $1 million umbrella policy comes with an annual premium ranging from $300 to $500, while a $5 million policy might cost you $600 to $700 per year, or about two dollars a day. If you have a weak credit history, a bad driving record, or teenage drivers in your household, you may pay a little more.
While paying the premium is easy, knowing how much coverage to get is the hard part since it’s not an exact science. The best practice here is to get somewhere between $1 million in umbrella coverage (obeying the “something is better than nothing” principle) and as much as your insurer will allow (which conforms to the principle of least regret).
Getting enough insurance to cover all your assets plus another $500,000 for legal defense seems like the happy medium. For example, a physician with a net worth of $2 million might opt for $2.5 million in coverage. As you make your decision, you might also consider factors such as how often you have guests in your home, how many miles you drive and whether your kids are likely to cause you to incur liability.
The best place to start shopping for coverage is with the insurance companies who currently cover your autos and your home since these policies are prerequisites for coverage.
When you set up your coverage, make sure there’s no gap between the top limit of your base layer coverage and the bottom limit of your umbrella policy. For example, if you have a $300,000 liability limit on your home, you might find yourself out of pocket for $200,000 when you incur a $1.5 million liability and also have $1 million in coverage from your umbrella policy. The first $300,000 would be paid by your base layer, then you would pay the next $200,000 and your umbrella would pay the remainder of the claim. A little diligence in the process can save you a bundle.
As a doctor, you already know people think you’ve got deep pockets. By putting a cheap but vital second layer of coverage on top of your base layers, you can show them the money if your legal team can’t show them to the exits first.
About the Authors
Lawrence B. Keller, CFP®, CLU®, ChFC®, RHU®, LUTCF is the founder of Physician Financial Services. Based in New York, he offers income protection and wealth accumulation strategies for physicians nationwide. Contact him at (800) 481-6447 or LKeller@physicianfinancialservices.com.
Ben Utley, CFP®, is an attending advisor with Physician Family Financial Advisors, a fee-only financial planning firm helping physicians throughout the U.S. to make a plan and get on track with saving for college and invest for retirement. Visit PhysicianFamily.com.