Umbrella_Policy
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai.
00:00:02.240 | I'm currently on sabbatical, which is why I haven't been recording many episodes.
00:00:06.000 | But I've been spending a lot of time with my insurance company, updating my umbrella
00:00:11.560 | policy and my auto insurance policy and my homeowner's insurance policy.
00:00:17.720 | And I think all of you guys have to do the same thing as well.
00:00:21.000 | We've been in a bull market, a surprising bull market that has lifted our returns in
00:00:25.560 | the stock market, bond market, real estate market, cryptos, whatever it is, since the
00:00:30.520 | beginning of 2020.
00:00:32.720 | And I'm assuming that most of you guys are much wealthier now, or at least have all time
00:00:37.960 | high net worth since the start of 2020.
00:00:40.900 | As a result, we need to update our insurance policies to protect ourselves, to protect
00:00:45.520 | our wealth, and to protect our family members.
00:00:48.560 | Let's first talk about the umbrella policy, which sits on top of your auto insurance and
00:00:52.920 | homeowner's insurance policies.
00:00:55.400 | For example, let's say you get into an automobile accident and cause bodily harm to a pedestrian.
00:01:00.480 | The pedestrian sees that you drive a fancy 7 Series BMW that costs $90,000 and decides
00:01:06.760 | to sue you for $500,000.
00:01:09.320 | The irony is that if you drove a beater car, the pedestrian might have only sued you for
00:01:13.440 | $50,000 or nothing at all.
00:01:15.880 | So this is an important reminder that there are some big downsides to having nice things
00:01:21.120 | that the public can see.
00:01:23.120 | So in this situation, when he decides to sue you for $500,000, your auto insurance policy
00:01:29.320 | has a $300,000 liability coverage with a $1,000 deductible, for example.
00:01:34.840 | And let's say you have a million dollar umbrella policy with a $300,000 deductible.
00:01:39.840 | So if the pedestrian successfully wins the $500,000 lawsuit, your umbrella policy kicks
00:01:44.380 | in to cover the remaining $200,000 over your $300,000 auto insurance liability.
00:01:50.720 | So why is this important?
00:01:51.720 | Well, it's important because let's say you spend 20 years to build a net worth of $500,000.
00:01:56.880 | Well, you need the auto insurance liability coverage and it's great to have that umbrella
00:02:01.640 | policy to protect you because you don't want to go backwards.
00:02:04.440 | You want to go back to zero.
00:02:06.000 | The reality is accidents happen all the time, whether it is your fault or not.
00:02:10.500 | Just having this lawsuit bear on top of you is really, really stressful.
00:02:14.680 | So having this umbrella policy provides a tremendous amount of peace of mind.
00:02:19.360 | We always want to be going forward on our financial journey, not backwards.
00:02:23.760 | So let me share more examples of why you should get an umbrella policy if you're not convinced.
00:02:28.880 | The first example or situation is if you have a teenager or multiple teenagers at home.
00:02:34.080 | An umbrella policy covers members of your household.
00:02:37.140 | So all the members of your household.
00:02:38.720 | So if you have more members of your household who are going out into society and risking
00:02:44.100 | doing funny things, your risk of an accident goes up.
00:02:47.920 | Having teenagers, I think, is the biggest one.
00:02:50.960 | It puts your household at significantly higher risk of liability.
00:02:55.120 | Not only are they inexperienced drivers, they sometimes experiment with drugs, alcohol,
00:02:59.880 | and all these other things that impair their judgment.
00:03:02.500 | And accidents do happen.
00:03:03.640 | I remember when I was a teenager in high school, I tried a ton of stupid things.
00:03:07.760 | I remember one time after tennis practice, there was a tennis teammate of mine and he
00:03:12.880 | smoked marijuana and he drove.
00:03:15.280 | And it was pretty dangerous because he drove right through a red light.
00:03:18.520 | And who knows what could have happened if there was another car.
00:03:20.720 | We could have t-boned the car or that car could have t-boned us.
00:03:23.480 | A lot of injuries could have happened and our households could have been sued.
00:03:28.120 | So really, if you have a teenager driving around everywhere, you got to get an umbrella
00:03:33.360 | policy because your teenager could literally bankrupt you.
00:03:37.380 | The second example of why you need an umbrella policy is if you plan to retire early with
00:03:41.240 | young children.
00:03:42.720 | One of the reasons why I've been saving and investing so much, especially during the pandemic
00:03:46.720 | since we've been locked down, is that I want to make more passive income.
00:03:50.880 | So if there's a lawsuit where I lose a chunk of my wealth, that means I lose a chunk of
00:03:54.360 | my passive income.
00:03:55.720 | And what's the point of my passive income?
00:03:57.320 | The point of my passive income is so I can spend time with my children before they don't
00:04:01.200 | want to spend any time with me.
00:04:03.120 | I know I've got until at most 18 years old until they no longer want to hang out with
00:04:07.680 | me.
00:04:08.680 | In reality, to the parents that I've talked to, my kids probably won't want to hang out
00:04:13.200 | with me after, I don't know, 13 or 14 years old.
00:04:16.160 | They want to hang out with their friends.
00:04:17.760 | Therefore, for me, having an umbrella policy is really about protecting the time I want
00:04:21.760 | to spend with my young children.
00:04:24.020 | And so for you, you've got to translate what that money and that passive income means to
00:04:28.880 | you.
00:04:29.880 | What do you want to do with your time and your money?
00:04:31.620 | That is really what an umbrella policy will help protect.
00:04:34.620 | Another example of why you might need an umbrella policy is if you're a multiple tenant landlord.
00:04:39.120 | The more properties you have, the more you run a risk of messing something up with your
00:04:44.280 | tenant.
00:04:45.280 | Who knows?
00:04:46.280 | Things happen all the time.
00:04:47.280 | You don't know exactly what is functioning in your property, even though everything could
00:04:51.380 | be done up to code and to permits.
00:04:53.760 | Maybe an electrical wire sparks fire and catches flame to the insulation and the house burns
00:04:59.280 | down.
00:05:00.280 | You just don't really know.
00:05:02.220 | What you should do, obviously, is make sure that all your tenants have a renter's insurance
00:05:06.520 | policy and have a really, really solid lease that describes what happens in case of certain
00:05:12.840 | events.
00:05:13.840 | But at the end of the day, you just don't know.
00:05:16.360 | Another example of why you need an umbrella policy is if you're a small business owner
00:05:19.860 | who sells a physical product or if you're a doctor.
00:05:23.120 | If you talk to any doctors out there, man, their liability medical malpractice insurance
00:05:29.520 | is a lot.
00:05:30.520 | It squeezes their profitability.
00:05:32.240 | It's one of the reasons why I think health care costs are so high.
00:05:36.600 | Let's say you operate a chocolate store and one of your employees has a psychotic breakdown.
00:05:41.140 | He decides to beat up a customer who is extremely rude and impatient.
00:05:44.800 | Well, that customer, let's say he injures his neck or something, could sue you for negligence
00:05:50.720 | and that's where an umbrella policy would protect you.
00:05:53.560 | Or maybe you run a restaurant that is already struggling to survive thanks to COVID.
00:05:57.700 | To boost revenue, you open an outdoor dining area where cars used to park on the street.
00:06:02.340 | You see that everywhere in big cities now.
00:06:04.640 | Less parking, but more outside areas for dining for safety.
00:06:08.240 | Then one unfortunate evening, a car barrels down through the outdoor dining area causing
00:06:14.540 | injuries to your diners.
00:06:16.420 | If the diner decides to sue you, well, that's where the umbrella policy kicks in beyond
00:06:20.800 | your business insurance.
00:06:22.400 | And finally, if you're a high profile individual, let's say you're a celebrity, politician,
00:06:27.320 | sports star, any type of high profile individual, getting an umbrella policy is very important.
00:06:34.240 | Risk is a numbers game.
00:06:35.240 | The more people who know you, the greater the chance that someone might sue you, whether
00:06:38.800 | you did something or not.
00:06:40.280 | You know, it's a lot of he said, he said, or he said, she said, or whatever.
00:06:45.160 | You just never really know.
00:06:46.800 | So it's another vote for stealth wealth, being modest, being kind to people, and just not
00:06:53.280 | getting into too many conflicts.
00:06:55.920 | Now maybe after you've listened so far, you're still not convinced you need an umbrella policy.
00:07:00.080 | Well, that's true.
00:07:01.080 | Not everybody needs or wants one.
00:07:03.500 | If you are driving a car, you probably have auto liability insurance.
00:07:09.520 | Or if you own a home, you have homeowners insurance policy with liability coverage.
00:07:13.980 | So if your net worth is below the liability coverage of your auto insurance policy or
00:07:18.500 | homeowners insurance policy, then perhaps you don't need an umbrella policy.
00:07:23.340 | Now let's say you drive a $40,000 Ford F-150 and you earn $70,000 a year.
00:07:29.200 | You're also married and have no children yet.
00:07:31.360 | And you've got credit card debt and you've got car loan debt.
00:07:34.320 | And at age 30, your net worth is about $70,000.
00:07:37.360 | Well, if your auto insurance policy liability coverage is $100,000, well, you're covered
00:07:42.720 | in case of an accident.
00:07:43.720 | So you don't need an umbrella policy.
00:07:46.200 | But in general, you should have an umbrella policy that is equal to slightly more than
00:07:51.400 | your current net worth because over time, your net worth tends to grow.
00:07:55.680 | Just look at your own net worth over the past six months, one year, two years, five years,
00:07:59.480 | 10 years.
00:08:00.600 | It's generally growing bit by bit as you save more and your investments do better.
00:08:04.320 | So you want to have that little buffer.
00:08:06.840 | At the same time, you don't want to have too large of an umbrella policy because too large
00:08:11.080 | of an umbrella policy might attract a lot more unwanted attention.
00:08:16.120 | Personal injury lawyers have the easy ability to figure out what your assets are.
00:08:21.240 | You just go to court.
00:08:22.240 | They summoned you in court.
00:08:23.320 | They ask you what your assets are.
00:08:25.160 | And boom, you got to tell the truth because you're under oath.
00:08:27.860 | And if you have, let's say, a $500,000 net worth, but a $5 million umbrella policy equal
00:08:32.760 | to 10 times your net worth, well, I think the personal injury lawyer will be more motivated
00:08:37.840 | to say that you inflicted way more damage and suffering than reality and go after more
00:08:44.080 | of that liability coverage.
00:08:46.480 | Besides, if you get too high of an umbrella policy, you're paying unnecessary premiums.
00:08:51.760 | And speaking of umbrella policy premiums, it's not that expensive, folks.
00:08:55.360 | I just checked with my insurance carriers and a couple more.
00:08:59.000 | And for my household, two driving household, it's only about $150 to $200 a year per million
00:09:07.520 | dollars of umbrella policy coverage.
00:09:10.160 | Now, I've seen other surveys that go up to like $300 to $500 per year per million.
00:09:17.720 | It depends on how big your household coverage is, how many products you have with that one
00:09:22.440 | insurance company.
00:09:23.440 | So if you want to save on your umbrella policy or all your other insurance policies, you
00:09:28.160 | should probably bundle your auto, your personal belongings, homeowners, umbrella, and so forth,
00:09:34.480 | all with one carrier.
00:09:35.800 | It's more efficient, first of all, and the carrier will probably give you a discount
00:09:39.640 | for being a multiple product customer.
00:09:42.120 | Now, there's something very important to consider that a Financial Samurai reader gave.
00:09:47.560 | He's an attorney, but he's not your attorney.
00:09:49.600 | So ask your attorney for professional advice.
00:09:52.920 | But what if there's a situation where someone hits you or kills you and they are underinsured
00:09:59.840 | or don't have insurance?
00:10:01.640 | Then what?
00:10:03.040 | So the reader said, well, you should consider getting an umbrella underinsured motorist
00:10:08.160 | coverage, UIM.
00:10:10.720 | This gives you umbrella UIM protection above the regular UIM limit you have on your policy.
00:10:17.840 | He says normal umbrella coverage only covers the injuries of people you injure through
00:10:21.680 | your negligence.
00:10:23.640 | The more likely scenario is that you and your family are injured by someone else.
00:10:28.920 | The average liability coverage that drivers have is only about $50,000 and many drive
00:10:34.580 | without insurance.
00:10:36.720 | Losing your family of three is hit by a driver with only $50,000 in coverage, killing the
00:10:41.120 | main breadwinner and seriously disabling the other two.
00:10:44.920 | In a normal scenario, you would be limited to recovering the $50,000 and whatever UIM
00:10:50.600 | coverage you have on your regular policy, say $300,000.
00:10:54.640 | So a total recovery of $350,000 would not even begin to cover the lifetime of lost earnings
00:11:00.440 | for the deceased and the daily in-home nursing care for the disabled.
00:11:06.480 | Umbrella UIM would kick in above the $350,000 and provide your family another million or
00:11:11.240 | more in coverage.
00:11:13.240 | As an attorney, the most common scenario I see is that there is rarely enough insurance
00:11:18.000 | coverage to cover the losses in a serious accident.
00:11:22.240 | Wow.
00:11:23.240 | All this time, we've been thinking about what we might do wrong to cause an accident, but
00:11:28.920 | we didn't think about what other people might do to us.
00:11:32.560 | And in this crazy big world of ours, not everybody is as responsible as us.
00:11:37.640 | Some just don't have insurance or some just have the state required minimum.
00:11:41.640 | And let's say you make, I don't know, $200,000 a year and you're dead.
00:11:46.560 | What is your family going to do if the underinsured motorist pays nothing or only has $50,000
00:11:52.800 | in auto liability coverage?
00:11:54.200 | $50,000 is not going to get your family very far at all.
00:11:58.280 | So I immediately, after reading this comment, called my insurance carrier and said, "Hey,
00:12:03.440 | do you have the Umbrella UIM that I could pay for?"
00:12:06.960 | And they said, "No."
00:12:07.960 | They said, "No, unfortunately."
00:12:11.040 | And you should check your own carriers and see if they have that.
00:12:14.440 | So the solution I came up with, that we came up with, is to increase my auto insurance
00:12:21.360 | liability coverage, which also increases my uninsured bodily protection coverage.
00:12:27.200 | It's a one-for-one increase.
00:12:28.680 | So I had $300,000 and $500,000.
00:12:31.840 | $300,000 per person and $500,000 per accident in terms of bodily injury coverage or uninsured
00:12:40.040 | motor liability coverage.
00:12:42.200 | So my solution was to simply raise that uninsured liability coverage from $300,000 to $500,000
00:12:50.760 | to $1,000,000.
00:12:53.080 | So in this case, if I were to die in an accident and it was not my fault, but an uninsured
00:12:59.600 | or underinsured motorist killed me, then hopefully my family will get $1,000,000.
00:13:06.400 | So it's $1,000,000, $1,000,000, so $1,000,000 per person and $1,000,000 total for the accident.
00:13:10.640 | And that's the best that my insurance carrier could do.
00:13:13.240 | I feel better about getting this new policy.
00:13:15.800 | It only costs me an extra $25 every six months.
00:13:19.000 | So to me, that's a no-brainer.
00:13:20.000 | However, unfortunately, it's not an automatic that my family will get $1,000,000.
00:13:24.880 | Just like with any kind of insurance policy that is at this level, it's going to require
00:13:30.280 | a lot more involvement with the lawyers and so forth.
00:13:35.060 | But I'm hopeful that the policy will pay out and protect my family.
00:13:38.940 | And finally, the other solution to this type of unfortunate scenario is to get an appropriate
00:13:44.200 | amount of life insurance.
00:13:45.920 | The appropriate amount of life insurance is probably a term life insurance policy that
00:13:50.520 | covers all your debt and covers all your family's expenses until your kids become independent
00:13:57.000 | adults.
00:13:58.040 | So that's about it, folks.
00:13:59.200 | I hope this episode has encouraged you to review your umbrella policy, auto insurance
00:14:04.160 | policy, homeowner's insurance policy, and any other type of insurance policy.
00:14:09.700 | This bull market has been a real boon for us investors.
00:14:13.480 | However, we need to protect our wealth and we need to protect our family.
00:14:17.520 | The more money we have, the more we have to lose.
00:14:20.400 | And if you are a parent, it is our ultimate responsibility to protect our children and
00:14:25.580 | our family.
00:14:26.580 | Thank you very much.
00:14:27.580 | And if you enjoyed this episode, I'd love a positive review on wherever you listen to
00:14:31.880 | this podcast.
00:14:33.120 | Take care, everyone.
00:14:34.120 | And I'll try to do more episodes.
00:14:35.120 | But again, I'm still on sabbatical until the end of August.
00:14:38.560 | And then I should have some more free time.
00:14:40.840 | But for now, I'm trying to enjoy life a little bit more.
00:14:43.480 | I went up to Sonoma to spend time with my family and it was so awesome.
00:14:47.940 | Take a vacation, folks, if you can.
00:14:50.040 | Get out of the city.
00:14:51.100 | Go to a place where there's not a lot of people.
00:14:53.360 | I really believe your mental and physical health will improve.
00:14:57.200 | It'll tick upwards as it has for me.
00:15:00.560 | Thanks again, everyone.
00:15:01.560 | Take care.
00:15:01.560 | Take care.