This week's report is an excerpt from our February issue of Dickerson Digest, our print newsletter. If you would like to receive Dickerson Digest in your mailbox, you can subscribe below.
No one plans to get sued. But sometimes the unexpected happens. You get in a car accident. Your decaying oak tree collapses onto your neighbor’s roof. A former business associate accuses you of breaching a contract. Your poodle, Mister Schnookums, bites some little kid in a park. You get the point. If your opponent obtains a judgment against you, he can probably pursue your personal assets to satisfy the judgment. This may include bank accounts, wages, real estate, vehicles, boats, personal items, and more. Once you get sued, things get a lot trickier. In many (if not all) states, courts have power to declare certain transfers of money and property to be fraudulent or otherwise invalid. These laws are designed to prevent defendants from evading their responsibility to pay judgments. For this reason, you should start your asset protection plan well before you get sued as in right now. In this article, we will focus on one of the most underrated and least considered of those steps; obtaining sufficient insurance coverage. Not only is it important to have enough insurance before you get sued, it might keep you from bankruptcy and financial ruin.
How do you know you have adequate insurance within your asset protection mix?
For most people, the two most important insurance policies are: Automobile liability insurance and homeowner’s insurance (renter’s insurance if you do not own a home). If you’re not sure if you have the right coverage, or if you think you may not have enough, make an appointment with a qualified insurance agent, company representative, or financial advisor. Here are some examples of what I would qualify as adequate coverage when I work with my asset protection clients.
Automobile liability insurance
Don’t settle for the minimum legal liability coverage on your auto insurance policy. If you’re involved in an accident that results in a lawsuit, you’ll be glad that you decided to pay a higher premium for the extra coverage. How much coverage should you buy? A possible guideline could be to have coverage that is equal to your total assets. Automobile liability insurance covers you in the event you negligently cause someone injuries, death, or other damages. Every insurance policy has policy limits. These are limits on the amount the insurance company will pay for a specific loss. For example, let’s say Daphne Driver has the following policy limits: $50,000 for bodily injury and $10,000 for property damage. While texting and driving, Daphne smashes into Mario Motorcycler, shattering half the bones in his body. Mario’s medical bills are $70,000 and his $13,000 motorcycle is destroyed. The most the insurance company will pay is $50,000 for Mario’s bodily injuries (out of $70,000) and $10,000 for his property damage (out of $13,000). This means that Daphne may be held liable to Mario for the $23,000 difference ($20,000 for bodily injury; $3,000 for property damage). Daphne would have been better off getting a policy with higher limits; however, she would have paid more in premiums. Insurance is always a tradeoff. Higher premiums mean less risk—and vice versa. It is not always an easy decision. Also, make sure you read and understand the exclusions in your policy, if any. Exclusions are provisions in the policy that eliminate insurance coverage for certain losses. What this means is that the insurance company will not pay under these circumstances. Every policy has its own exclusions, but I will go over two important exclusions: (1) excluded drivers, and (2) business use. Let’s start with excluded drivers. I am often shocked to see how many people do not realize until after an automobile collision that their own children are excluded drivers under the policy. Read your policy thoroughly and/or contact your insurance agent to find out if anyone is excluded under your policy. If someone is excluded, they must NEVER drive your car, not even for a short drive to pick up tacos. No taco is worth personal liability! The second exclusion is the business use exclusion. If you use your car for work make sure your automobile policy does not exclude business use. If it does and you get in an accident, there is a high probability the insurance company will refuse to pay. You may need to purchase additional coverage to insure you for potential business-related accidents.
Homeowners insurance isn’t just about protecting what is probably your single largest investment against fire and flood, but also about protecting you against a potential lawsuit. If someone is hurt on your property and decides to sue you, any liability coverage on your policy could defend you against lawsuits that fall under the terms of your policy, and satisfy any court-ordered judgments up to the amount specified in your contract and can provide you with liability coverage for a wide array of potential claims. Here are a few examples of claims that might be covered:
· Your tree falls, causing damage to your neighbor’s roof
· Your dog bites someone
· Someone slips and falls on your icy porch
· Your kid’s baseball shatters your neighbor’s window
· Your washing machine floods and destroys the neighbor’s priceless Persian rug
As with any other insurance policy, make sure you have sufficient policy limits and that you understand the exclusions to the policy. If you operate a business out of your home, make sure you are either covered under your homeowner’s policy (this is rare) or get a separate business insurance policy.
Umbrella Liability Insurance
If a lawsuit is brought against you and your homeowners, auto, or other type of liability coverage isn’t enough to cover the total expense, an umbrella policy can pick up where your coverage leaves off. For example, if you have a $1 million dollar auto liability policy and are served with a $2 million dollar judgment, your umbrella policy should pay the additional $1 million. Without it, plaintiffs could seize your assets and garnish your wages to pay for the damages. Dollar-for-dollar, an umbrella insurance policy can be one of the most affordable ways to obtain additional protection beyond what is provided by your home and auto policies. Note that before an insurer will sell you an umbrella policy, however, they will require that you maximize the limits of your coverage under your home and auto policies.
Your greatest asset is your income. Therefore, it makes sense to protect it, right? The fact is, when you die, your paychecks stop. Life insurance helps ensure that your loved ones will have enough money to pay for everyday living expenses after you’re gone. For example, you obtain a policy on the life of your business partner to provide a source of funds to buy out your partner’s heirs for an agreed price in the event of your partner’s death. This can help prevent a scenario in which your partner’s surviving spouse owns half of your business, but you do not have sufficient cash to buy him or her out.
Long-Term Care Insurance
There are certain things that your healthcare policy won’t cover – especially if you were to suffer a long-term illness or disability. Long-term care insurance pays for certain coverages that you could be left paying for out of pocket. Without it, you may have to cover these expenses by liquidating your retirement savings or even selling your home or other assets. Sometimes people don’t purchase long-term care insurance because they cannot afford or do not want to pay the premium for a policy with all of the bells and whistles. Consider, however that even a policy which pays only a portion of the daily cost of long-term care, when combined with your other sources of income late in life can significantly slow the rate at which you lose your assets. There is no magic trick to guarantee that no one will ever seize your assets. At its core, what many people refer to as asset protection is essentially “risk management.” As with everything in life, it is impossible to anticipate every possible scenario. Nevertheless, if you plan ahead and do your homework, you can put yourself in the best possible position to protect your assets from creditors.
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